Oil prices fell on Thursday on expectations that the exchange of military strikes between the US and Iran will not lead to a resumption of all-out war, and that the two countries will ultimately return to negotiations.
Brent, the benchmark for two thirds of the world's oil, fell by 1.23 per cent to $77.06 a barrel as of 12.19pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was trading 1.13 per cent lower at $72.59 a barrel.
Crude prices fell after two days of sharp gains. Brent, which was trading at prewar levels last week, rose by more than 5 per cent on Wednesday after US President Donald Trump said he did not want to engage with Iran and declared the framework peace agreement to be “over”.
His remarks followed attacks on a Qatar-owned LNG tanker and two other ships in the Strait of Hormuz, which also prompted US strikes on Iran. Tehran retaliated with missile and drone attacks on Bahrain and Kuwait.
Although the exchange continued into Thursday, the scale of the attacks remained limited.
“The immediate upside pressure could be less severe than what we saw in the first weeks of the war,” said Ipek Ozkardeskaya, a senior analyst at Swissquote.
“The market has become accustomed to the tension and the disruptions in the Strait of Hormuz. The surprise factor is much smaller than it was at the beginning, and the market's overreaction is therefore more limited.”
Mr Trump has played down the prospects of a renewed all-out war with Iran. However, his administration has revoked a sanctions waiver that had authorised the sale of Iranian oil to maintain economic pressure on Tehran.
The waiver was granted under the framework agreement signed late last month, and gave Iran 60 days to sell its oil without being subject to punitive measures. Its revocation means Tehran will not be able to sell the oil that has already been shipped and is now at sea.
The move could compound global supply concerns, but Ms Ozkardeskaya said several ships had already crossed the Strait of Hormuz and were “delivering oil to key markets”.
“A few days ago, Saudi Arabia significantly cut the price of its oil for Asian buyers to ensure that millions of barrels would be absorbed quickly,” she added.
Brent, which hit an intraday high of $126 a barrel in March, fell last week below its prewar level of $72.87 amid easing regional tension and concerns of a supply surplus.
The recent hostilities have sparked concerns about continued flow of trade through the Strait of Hormuz. The waterway is vital to the global energy supply, especially markets in Europe and Asia. Before the war, a fifth of global oil and gas supplies crossed the chokepoint.
“Going forward, the trajectory of the US-Iran conflict, the security of shipping through the Strait of Hormuz and the scale of any disruption to Gulf oil exports will remain the key drivers of oil prices,” said Soojin Kim, Dubai-based analyst at Japanese lender MUFG.
Any further escalation is “likely to restore a larger geopolitical risk premium”, she added.
