Oil prices rose more than 5 per cent on Monday after the US and Iran exchanged strikes as negotiations to end more than three months of Middle East war continued.
Brent, the benchmark for two thirds of the world's oil, was up 4.61 per cent to $95.32 a barrel at 11.02pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was trading 5.94 per cent higher at $92.55 a barrel.
“Every new strike weakens the market’s belief in de-escalation and reminds traders that the risk premium may have been reduced too early,” Ahmed Al Juqqa, head of financial market research at Equiti Group, told The National.
If air strikes intensify, "Brent could move back toward the mid-to-high $90s, and the $100 level would return to the table if shipping risks become more direct”, he said.
But if diplomacy regains momentum, oil could give back part of the premium, he added.
Iran’s Islamic Revolutionary Guard Corps said its air force struck and destroyed an airbase it claims was used by the US to launch an attack on a telecoms tower.
It did not say where the strike happened. But the statement came out about the same time that Kuwaiti authorities said missiles and drones were fired at its territory.
This came after the US military carried out strikes on two Iranian command-and-control sites in the Strait of Hormuz at the weekend. The strikes were a response to Iran shooting down a US drone that was operating over international waters, the US Central Command said.
US Pentagon chief Pete Hegseth told the International Institute for Strategic Studies Shangri-La Dialogue that the US was in a “good place” to reach an agreement and that talks were “productive”, although no details were provided on the sticking points in the negotiations.
Analysts, however, warned that there is a chance oil flows will not return to pre-war levels if the Strait of Hormuz remains in Iranian control.
“Washington could conceivably walk away and declare the war over, but that would probably leave the Strait of Hormuz under Iranian control,” said Helima Croft, head of global commodity markets at RBC Capital Markets,.
Ms Croft said that any scenario ending with Iran determining which ships navigate the strait will result in flows appreciably below pre-war levels.
“As long as the [IRGC] remains a sanctioned entity, we think western companies will be wary of paying a toll to access the approved shipping lane, and the risk of renewed maritime attacks will potentially disincentivise an immediate return.”
Oil prices have remained volatile and posted their steepest weekly decline last week since early April, due to hopes that the US and Iran may finally strike a peace deal.
Goldman Sachs forecast
Goldman Sachs expects two-sided risks to oil prices as a slump in demand competes with supply losses from the Middle East.
There could be significant upside price risks from more persistent supply losses but also meaningful price downsides from weaker demand, Goldman Sachs said on Sunday.
It added that weak oil demand in China and Europe poses a major downside risk to its fourth-quarter Brent crude forecast of $90 a barrel and WTI forecast of $83, with $10 a barrel of downside risk to Brent crude.
