Oil prices slipped by another 3 per cent to a near one-month low on Wednesday, as expectations that the US will not attack Iran for now and “constructive” talks between Tehran and Oman provided hope for easing tensions.
Brent, the benchmark for two thirds of the world's oil, was down 3.03 per cent to $85.90 a barrel at 1.57pm UAE time. West Texas Intermediate, the gauge that tracks US crude, declined 2.95 per cent to $79.93 per barrel.
It is the first time Brent has hit $85 and WTI has slid below $80 since early this month. For the week, they have retreated nearly 7 per cent and 6.1 per cent, respectively. Crude prices fell to a one-week low on Tuesday, after posting sharp weekly gains last week.
The latest sharp fall comes as the market “increasingly senses” that the US and Iran are looking for an exit ramp to spare them more economic pain, said Ole Hansen, head of commodity strategy at Denmark's Saxo Bank.
“The change in sentiment has been swift,” he said. “Only a week ago, markets were focused on renewed tension … today, the focus has shifted towards diplomacy … the result is a rapid unwinding of part of the geopolitical risk premium embedded in crude prices,” he said.
“However, the physical energy market remains far from normal, suggesting the market is trading the prospect of improving supply conditions well before those improvements have actually materialised.”
The oil market remains at the centre of the war in Iran, with investors keeping a close eye on the latest developments aimed at brokering an end to the nearly seven-month conflict. Moves and rhetoric from the US and Iran have contributed to oil's volatility.
Apparent progress has been made, according to Omani Foreign Minister Badr Al Busaidi, who said he had held “constructive dialogue” with his Iranian counterpart Abbas Araghchi in Tehran, after which he was “hopeful” that a temporary corridor and “practical arrangements” to restore safe navigation in the Strait of Hormuz will be announced.
The strait, which before the war carried around a fifth of the world's energy exports, remains a contentious issue between the US and Iran.
Iran has said a new shipping arrangement with Oman does not constitute a reopening of the waterway, which Tehran claims will reopen only when the war ends on all fronts and the blockade is lifted.
Meanwhile, US Secretary of State Marco Rubio told a number of his foreign counterparts that Washington is not expected to launch new strikes against Iran “for the time being” and will instead focus on economic pressure, US outlet Axios reported on Tuesday, citing a US official and a second source with knowledge of the matter.
The US imposed sweeping sanctions on Tehran and its trade partners this week in an effort to break the deadlock.
Washington is also reportedly preparing to send diplomats back to its embassies in the Middle East that were evacuated before and during the war with Iran, a move that suggests the immediate risk of a renewed escalation has eased.
“Lower oil isn’t enough if it’s not backed by durable peace and easing impact on refined product prices,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Group.
