Oil prices slip as markets react to Strait of Hormuz reopening, but analysts warn of over-optimism

U.S. West Texas Intermediate crude settled at $76.60 a barrel on Thursday, a weekly decline of almost 10%, and gasoline prices slipped below $4 per gallon for the first time since March. The moves followed an agreement to reopen the Strait of Hormuz, which lifted market sentiment and helped U.S. equities approach record highs.

"Traders are kind of pricing in perfection," said David Oxley, chief commodities and climate economist at Capital Economics. "It’s the relief that the strait’s open – this is wonderful news compared with the nightmare scenario of it being shut."

Oxley added that the market may have moved too far ahead of reality, noting that the agreement only provides a 60-day cease-fire and that traffic through the waterway remains far below pre-war levels. Concerns persist about mines, insurance costs and the ability of Gulf producers to restore output after war-related damage.

"I do see pretty substantial risk that this doesn’t play out as optimistic as maybe some are pricing into the market," said Adam Turnquist, chief technical strategist at LPL Financial.

Turnquist also said the market is assuming a smooth path for the next two months, despite uncertainties about possible re-closure of the strait or new logistical fees.

The S&P 500 has risen about 9% since the conflict began in late February, buoyed by optimism around artificial-intelligence stocks. However, equities fell on Wednesday after the Federal Reserve left rates unchanged, and traders are now pricing in a potential rate hike as early as September.

Analysts at Citi have lowered their third-quarter oil price forecast to $75 a barrel, down from a prior $110 estimate, reflecting the expectation that reduced oil prices will continue to support equity markets. Investors will be watching for a sustained increase in oil traffic through the Strait of Hormuz before concluding that lower prices are likely to persist.