Brent crude oil fell below $74 a barrel on Wednesday for the first time since the outbreak of the Iran war in late February, as market participants continue to strip away the geopolitical risk premium that had pushed energy prices higher during the conflict.
The benchmark, which had traded above $80 for much of March and April, has now shed more than 8 percent from its post-invasion peak. Analysts attribute the slide to a combination of easing supply fears and renewed focus on weakening global demand, particularly from Europe and China.
Risk Premium Unwinds
The Iran war, which began on February 27, initially sent crude prices soaring as traders feared disruptions to shipments through the Strait of Hormuz, a critical chokepoint for about a fifth of the world's oil. Brent briefly touched $86 in early March, its highest level since 2023. But as the conflict has remained largely contained to Iranian territory and failed to escalate into a broader regional confrontation, the market has steadily repriced.
“The risk premium that was baked into prices in late February and early March has now been almost fully unwound,” said Carsten Fritsch, an energy analyst at Commerzbank in Frankfurt. “The market is now looking at fundamentals, and those are not particularly supportive.”
European refineries, which had been stockpiling crude in anticipation of supply disruptions, are now drawing down inventories. The recent drop in fuel prices in Portugal, where petrol and diesel fell by 12 cents per litre, mirrors a broader trend across the continent as wholesale costs decline.
Demand Concerns Mount
Beyond the immediate conflict dynamics, traders are increasingly worried about the health of the global economy. The European Central Bank’s latest lending survey, released last week, showed that credit conditions for businesses in the eurozone remain tight, while industrial production in Germany—the bloc’s largest economy—contracted for a third consecutive month in April.
In China, the world’s largest crude importer, economic data has been mixed. While services activity expanded in May, manufacturing output slowed, and property sector woes continue to weigh on oil demand growth. The International Energy Agency, based in Paris, recently revised down its 2025 demand forecast for the second time in three months, citing weaker-than-expected consumption in both Europe and Asia.
The Organization of the Petroleum Exporting Countries and its allies, including Russia, are scheduled to meet in Vienna next week to discuss production levels. Several delegates have indicated that the group may consider extending or deepening existing output cuts to prop up prices. However, internal divisions remain, with some members—particularly those in the Gulf—reluctant to cede further market share.
Broader Market Implications
The decline in crude prices is providing some relief to European consumers and businesses, who have been grappling with elevated energy costs since the war in Ukraine began in 2022. Lower oil prices reduce input costs for manufacturers and help ease inflationary pressures, potentially giving the ECB more room to consider interest rate cuts later this year.
For European airlines, the drop in jet fuel costs is a welcome development after a challenging period. Carriers such as Lufthansa, Air France-KLM, and Ryanair have all cited fuel expenses as a major drag on profitability. Similarly, logistics companies across the continent, from Deutsche Post DHL to DSV, stand to benefit from lower transportation costs.
Yet the broader geopolitical landscape remains uncertain. The Iran war, while contained for now, has not formally ended. Diplomatic efforts led by the European Union and the United Nations have so far failed to secure a ceasefire. Any escalation—whether a new offensive or a disruption to shipping lanes—could quickly reverse the current price trend.
“We are not out of the woods yet,” said Fatih Birol, executive director of the IEA, in a recent interview with European Pulse. “The risk of supply disruptions remains real, and the market is still vulnerable to shocks.”
For now, however, the direction is clear. Brent crude at $74 is a far cry from the panic-driven highs of early March, and the market is signaling that the worst of the Iran war premium may be behind us.
