Oil prices pulled back in Asian trading on Tuesday, as fears of supply disruptions tied to the U.S. blockade of the Strait of Hormuz softened, with investors encouraged by indications that diplomatic engagement between Washington and Tehran could resume.
Brent crude futures dropped 76 cents, or 0.8%, to $98.57 by 06:01 GMT, while U.S. West Texas Intermediate (WTI) crude fell $1.63, or 1.65%, to $97.45.
Both benchmarks had surged in the prior session, with Brent rising more than 4% and WTI close to 3%, after the U.S. military moved to impose a blockade on Iranian ports. Over the past month, oil prices have climbed roughly 50%, marking a sharp and historic increase.
On Monday, the U.S. military said the blockade would stretch beyond the Strait of Hormuz into the Gulf of Oman and parts of the Arabian Sea. Vessel-tracking data also indicated that two ships reversed course as the restrictions took effect.
Iran responded by warning it could target ports in Gulf nations, following the breakdown of weekend talks in Islamabad aimed at easing tensions around the strategic waterway, which typically carries about one-fifth of global oil and gas flows.
Despite the failed negotiations, markets appear to be pricing in the possibility of a diplomatic resolution, even as the U.S. continues to enforce restrictions on Iranian ports.
Sources told Reuters that both sides remain open to dialogue, with a U.S. official noting there has been forward movement toward a potential agreement.
U.S. President Donald Trump also said Iran is looking to “make a deal,” although he ruled out any agreement that would permit Tehran to develop nuclear weapons.
“While supply can restart within days to weeks, restoring output is likely to take months, even for undamaged assets,” Commonwealth Bank of Australia said in a note released Tuesday.
The bank added that reopening the Strait would be the “first domino that needs to fall”.
“Despite the breakdown of peace talks in Pakistan over the weekend, Trump has managed to take some steam out of the oil price, again dangling the carrot of a possible deal,” said Tim Waterer, chief market analyst at KCM Trade.
People familiar with the discussions said communication between the U.S. and Iran remains ongoing, while Pakistan’s Prime Minister Shehbaz Sharif reiterated efforts to de-escalate tensions.
Analysts at ANZ estimate that roughly 10 million barrels per day of supply has effectively been removed from the market, with a prolonged blockade potentially cutting an additional 3 million to 4 million barrels per day.
“The oil market no longer needs a worst-case escalation to justify higher pricing,” ANZ said in a client note. “Tight balances alone are sufficient to sustain the price of Brent near or above recent threshold levels.”
Some NATO members, including Britain and France, have opted not to participate in the blockade, instead calling for the reopening of the vital shipping route.
U.S. Energy Secretary Chris Wright suggested oil prices could peak in “the next few weeks” once maritime traffic resumes.
Meanwhile, the International Monetary Fund, World Bank, and International Energy Agency have cautioned against hoarding energy supplies or imposing export restrictions, describing the current disruption as one of the most significant shocks to global markets.
On Monday, IEA Executive Director Fatih Birol said that while additional strategic stock releases may not yet be required, the agency stands ready to respond if conditions worsen.
Separately, the OPEC lowered its forecast for global oil demand in the second quarter by 500,000 barrels per day in its latest monthly report.
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