The price of Brent crude oil dropped on April 8, following a ceasefire agreement reached between the US and Iran.
Following the onset of US and Israeli military operations in Iran at the end of February, oil prices spiked, as the conflict raised concerns around global oil supply. In particular, transit through the Strait of Hormuz has been a critical issue. A key shipping route through which about 20% of the world’s oil is transported, the strait has effectively been closed, with vessels under threat of attack from Iran.
After weeks of increasing hostilities and escalating rhetoric, on April 7, the US and Iran agreed to implement a conditional two-week ceasefire. Crucially, the agreement includes the reopening of the strait.
Following the announcement, Brent prices fell to $94.75/barrel on April 8, down by 6.4% week-over-week (WOW), and from a recent high of $118.35/barrel.
Elevated energy prices over the past month have been a key watch-out factor for participants in many agricultural commodity markets, with the increasing cost of shipping a major concern. Many carriers have added emergency surcharges to their freight rates in response to the rising cost of bunker fuel.
However, market sources have described knock-on effects beyond freight rates. Speaking to Expana, sources stated that, in addition to transport, they were facing rising costs for plastic packaging and processing due to higher fuel prices.
Indeed, prices for plastic products in Europe and China have increased significantly following the start of the war. In March, the PET spot price CFR China reached $1,145/metric ton, up by 48% MOM.
Crude oil is a strong leading indicator for the plastics market. Under normal circumstances, crude oil price movements usually feed into feedstocks and then into plastics with a two-to-three-month lag. However, the outbreak of the war has created such a significant shock that the oil price spike was reflected immediately in feedstocks used to make polyethylene, polypropylene, and PET.
Despite the ceasefire announcement, the current status of the strait is unclear. On April 8, Iran stated that vessels transiting the strait without permission would be attacked and has also suggested imposing a toll on oil moving through the strait. In addition, ongoing Israeli attacks on Lebanon have raised concerns over whether or not the ceasefire will hold. Sources regard the situation as tenuous, and market reports continue to anticipate volatility and uncertainty.
Written by Craig Elliott
