A two-week ceasefire, and oil falls 13% in a day

Forty days after the war began, the US and Iran agreed on April 8 to a conditional two-week ceasefire, brokered by Pakistan, with a path toward reopening the Strait of Hormuz. Brent crude fell about 13% almost immediately, to below $95 a barrel. Indian shares rallied, the rupee firmed and oil marketing companies, which had been absorbing losses on every litre of petrol, saw relief in their share prices. It was a sharp reminder of how much of a war-time oil price is the price of fear.

The fear premium

When a supply route is threatened, oil traders do not only price the barrels actually lost. They price the chance that more will be lost, adding what economists call a risk premium. A ceasefire does not put a single extra barrel on a tanker overnight, but it shrinks the odds of the worst outcome, and that alone can knock 10% to 15% off the price within hours.

What it means for India

Every dollar off a barrel helps. Lower oil narrows the import bill, eases pressure on the rupee and reduces the risk of inflation feeding through to food and transport. But a two-week truce is not peace, and markets know it. Oil is still well above where it was before February 28. Until the strait is reliably open and the ceasefire becomes permanent, prices will remain high and volatile, swinging on every statement from Washington and Tehran.