Oil prices fell on Thursday, after rising about 4 per cent on Wednesday amid signs of escalating tension between the US and Iran.
Brent, the benchmark for two thirds of the world's oil, was down 1.78 per cent at $68.53 a barrel at 3.20pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was trading 1.85 per cent lower at $66.89 a barrel.
Both the benchmarks rose by more than 4 per cent on Wednesday.
The US State Department on Wednesday began preparing to evacuate non-essential staff from the American embassy in Baghdad amid faltering efforts between Washington and Tehran to reach a nuclear deal. The US also authorised military dependents from locations across the region to leave.
“They are being moved out because it could be a dangerous place,” US President Donald Trump said. “We've given notice to move out and we'll see what happens. [Iran] can't have a nuclear weapon. Very simply, they can't have a nuclear weapon, we’re not going to allow that.”
The oil price change looks like a “short squeeze amid rising geopolitical tensions in the Middle East”, said Giovanni Staunovo, a strategist at Swiss bank UBS.
“The decision of the US might be used as leverage in the nuclear talks, which are on this weekend,” he added.
While US-Iran tension is increasing, military action is unlikely at least until US summer peak demand time is over, said Mukesh Sahdev, senior vice president and global head of commodity markets in oil trading at Rystad Energy. "There is indeed a bigger downside from that as Iran had recovered a lot," he said. "The upside from a deal is not much."
Current estimates suggest Iranian production has rebounded despite sanctions, largely due to China's buying, according to Rystad.
Meanwhile, crude was also boosted by the trade truce reached between the US and China this week. Officials from the US and Beijing said on Tuesday night they had agreed to a framework deal after two days of high-level talks in London.
Mr Trump on Wednesday hailed the truce and said the country's relationship with China was “excellent”.
“Our deal with China is done. Subject to final approval with President Xi [Jinping] and me,” Mr Trump wrote on his Truth Social platform. The US leader added that he and Mr Xi “will work closely together to open up China to American trade”.
Vandana Hari, founder of Vanda Insights said “the broader market cheer from the latest thaw in US-China trade tensions may endure for the next few days at least, sustaining support for crude”.
She added that this was “especially as it comes in the backdrop of an evolving consensus expectation that the US will settle for a much lower level of ‘reciprocal tariffs’ with its trading partners than the levels Trump announced on April 2”.
The benign US May inflation data has added to the positivity by bolstering confidence in the economy, said Ms Hari.
“However, the US-Iran situation is in a major flux,” she added. “Tensions could escalate or they could ease, prompting crude to shake off some of the supply risk premium.”
Looking ahead, she expects Brent to average in the high-$60s for the second half of this year.
“While the low-$60s for Brent may be in the rear-view mirror, the overall theme for this year, framed by an economic slowdown amid US tariff tensions and Opec+ accelerating its supply boost, is intact,” she said.
Mr Staunovo said volatility will stay high. “Our end-of-June forecast for Brent is at $68 a barrel”, he said.
Rystad Energy expects Brent prices to remain within the $65-$70 a barrel range in the coming weeks.
"While the market continues to seek direction from geopolitics and macro-level trade agreements, the fundamentals remain in control," Mr Sahdev said.
"Oil prices are increasing, with fundamentals improving and balances are tight even with Opec+ return," Mr Sahdev said.
"Opec+ is positioning itself well by increasing targets during the summer demand months so that post summer months, it has room to announce cuts again when fundamentals may not be as supportive.”
