Brent crude posted its worst month in six years in May, a steep decline that unwound much of the war-risk premium that had inflated oil prices through the spring. The international benchmark fell more than 19 per cent over the month, its sharpest monthly drop since March 2020, when the onset of the Covid-19 pandemic shuttered economies and collapsed demand. This time the driver was not a demand shock but the growing expectation of peace.
The proximate cause was diplomacy. As negotiators advanced a sixty-day memorandum that would reopen the Strait of Hormuz, lift the American blockade on Iranian ports and pause the war, traders steadily marked down the probability of a prolonged disruption to Gulf oil flows. The strait, through which a large share of the world's seaborne crude passes, had been largely closed by the conflict, and its reopening would restore a critical artery of global supply.
Prices fell again on Friday to cap the month, with Brent settling near $92 a barrel and West Texas Intermediate around $87, both down well over one per cent on the day. The moves reflected the market's judgement that a sustained Hormuz blockade had become less likely, even as the memorandum awaited President Trump's signature and the possibility of a collapse kept some risk premium intact.
The scale of the monthly decline underscored how heavily war fears had been built into the price. Through the spring, the combination of military strikes, Iranian threats to shipping and the closure of the strait had driven crude sharply higher, feeding into the inflation readings that have unsettled policymakers. The reversal in May handed back much of that move in a matter of weeks, on little more than the expectation of a deal.
For consumers and central banks, cheaper oil offers relief from the energy-driven inflation that hot price data had laid bare, and a sustained decline would ease the pressure on policymakers weighing how long to keep interest rates elevated. For producers, the drop squeezes revenues and tests the resolve of an oil cartel that had benefited from the wartime premium now draining away.
The market's direction from here rests on the same uncertainty hanging over every asset class: whether the memorandum is signed and the strait genuinely reopens. A finalised deal that restored shipping would cement the decline; a breakdown would send prices climbing again as the war-risk premium snapped back into the price.