Oil prices fell sharply on Monday as hopes for renewed diplomacy between the United States and Iran prompted investors to unwind much of the geopolitical premium that had driven crude prices to multi-month highs last week.
Brent crude futures dropped 6% to $90.93 per barrel by 06:11 GMT after briefly trading below the $90 level earlier in the session. U.S. West Texas Intermediate (WTI) futures also declined, falling 6.1% to $83.83 per barrel.
Markets react to improving diplomatic outlook
Crude prices had surged toward $100 per barrel last week after escalating military action raised fears that oil exports from the Middle East could face significant disruption.
Sentiment shifted after Washington suspended military strikes following 13 consecutive nights of operations, signalling a willingness to give diplomatic efforts an opportunity to progress.
Tehran responded by indicating it would also pause retaliatory attacks while the United States maintained its military suspension, although both countries stressed they remain ready to resume military action if negotiations fail.
Investors were further encouraged by reports that China is working to restart diplomatic discussions between Washington and Tehran, increasing expectations that the conflict may return to the negotiating table.
ING analysts said the sharp decline in crude prices reflects the market’s willingness to quickly remove risk premiums whenever geopolitical tensions begin to ease. However, the bank cautioned that uncertainty remains high and warned it is too early to conclude that a lasting resolution has been achieved.
Shipping concerns continue to support long-term risks
Although the immediate geopolitical outlook has improved, traders continue to monitor shipping activity through key energy corridors.
Traffic through both the Strait of Hormuz and the Bab el-Mandeb Strait remained below normal over the weekend following recent attacks linked to Houthi forces, highlighting that logistical risks have not disappeared.
ANZ noted that the market has so far been supported by lower Chinese crude demand, emergency stock releases and alternative Saudi export routes that bypass the Strait of Hormuz.
However, the bank warned that these mitigating factors may become less effective as strategic reserves decline, commercial inventories tighten and transport risks remain elevated. Should supply disruptions worsen again, oil prices could quickly resume their upward trend.
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