Oil Prices Fall Sharply as US and Iran Pause Fighting

Oil prices experienced a significant decline on Monday, with Brent crude futures falling 6.4% to $90.58 and West Texas Intermediate crude down 6.5% to $83.51 a barrel. This drop followed a weekend pause in fighting between the U.S. and Iran, which has raised expectations of a diplomatic resolution and a potential resumption of shipping through the Strait of Hormuz. Both contracts reached their lowest levels in nearly a week after three consecutive weeks of increases. Brent crude had previously surpassed $100 per barrel as the conflict impacted shipping routes, including the Strait of Hormuz and the Bab el-Mandeb strait.

U.S. Ambassador to the United Nations, Mike Waltz, indicated that President Donald Trump had decided to halt U.S. strikes to allow more time for diplomatic efforts. Analysts at ING noted that the sharp fall in early trading reflected the market's "desperation for positive news" amid signs of potential de-escalation. Despite the pause, the number of commodity vessels passing through the Strait of Hormuz remained low over the weekend, according to shipping data from Kpler. Analysts suggest that any rebound in flows through the strait is likely to be gradual, as shippers will require greater confidence in safety before increasing traffic.

Further complicating the shipping landscape, traffic through the Bab el-Mandeb strait decreased on Sunday following attacks by Yemeni Houthis on Saudi oil installations along the Red Sea coast. However, a Chinese supertanker did successfully exit the strait.

Some analysts caution that oil markets could still see support if crude supplies remain constrained by ongoing shipping risks in the Middle East and the war in Ukraine. UOB analysts stated that sustained supply disruptions, exacerbated by Ukrainian drone strikes on Russian oil sites, would likely keep oil prices elevated and contribute to global inflation.