Oil prices moved sharply lower again on Wednesday as investors reacted to reports of progress in diplomatic efforts aimed at easing the Middle East conflict and restoring shipping through the Strait of Hormuz.
By 04:17 ET, or 08:17 GMT, Brent crude futures were down 2.6% at $86.30 a barrel, while US West Texas Intermediate futures had fallen 2.7% to $80.18.
The declines extended Tuesday’s selloff, when oil prices dropped more than 5% following reports that Washington and Tehran could be nearing another ceasefire agreement.
Reports suggest US and Iran are moving closer to a deal
Russian state-owned agency RIA Novosti reported that the US and Iran were close to reaching a new ceasefire agreement, citing sources in Pakistan and Iran.
According to the report, the proposed arrangement would provide for free navigation through the Strait of Hormuz and could be formally announced in the coming days. Investing.com said it was unable to independently verify the report.
The claims follow comments from Pakistani officials indicating that progress had been made in mediation efforts with Iran and that discussions included the possible restoration of an interim ceasefire.
Pakistan has emerged as an important mediator during the US-Iran conflict and also played a role in brokering a ceasefire between the two sides in June.
Temporary Hormuz shipping route adds pressure to crude
Further pressure on oil came from reports of progress between Iran and Oman over maritime traffic through the Strait of Hormuz.
Al Jazeera reported that a senior Iranian official said the two countries had agreed on a temporary route through the waterway following talks in Tehran.
The official reportedly cautioned, however, that a full reopening would depend on the US meeting commitments contained in a framework ceasefire agreement signed in June.
The possibility of increased commercial shipping through the strait has encouraged traders to remove some of the supply-risk premium that had built into crude prices since the conflict began.
Vital Knowledge analysts warned that renewed fighting remains a significant possibility, describing the risk as always “just around the corner.”
“[A] geopolitical risk factor will be permanently embedded in the price,” they said.
Hormuz traffic remains far below normal levels
Despite the diplomatic developments, shipping activity through the Strait of Hormuz remains heavily restricted.
Preliminary Kpler data cited by CNBC showed that just five commodity vessels crossed the waterway on Tuesday, well below the 10-day moving average of 15.
Before hostilities began in late February, around 20% of global oil and liquefied natural gas shipments passed through Hormuz, making access to the route a major factor for international energy markets.
The Iran-Oman discussions also followed the introduction of tighter US economic sanctions against Tehran a day earlier.
Washington has indicated that it currently favours increasing economic pressure rather than pursuing additional military strikes, adding another dimension to the diplomatic and market outlook.
Oil prices are therefore likely to remain highly responsive to any further evidence of progress, or setbacks, in efforts to restore normal traffic through the Strait of Hormuz.
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