Oil prices fell more than 5% on Tuesday after Qatar and US Treasury Secretary Scott Bessent expressed optimism about a possible agreement between the United States and Iran.
The comments raised hopes that the Strait of Hormuz could reopen, reducing concerns over disruptions to global oil supplies.
The shift in sentiment pushed both global benchmarks to their lowest closing levels in nearly three weeks as traders pared back the geopolitical risk premium that had supported prices in recent sessions.
Brent crude futures settled at $79.36 a barrel, down $4.41, while US West Texas Intermediate (WTI) crude futures settled at $75.77 a barrel, down $4.57. Both benchmarks closed more than 5% lower.
Markets responded when Qatar gave indications of progress in negotiations involving Iran. The US Treasury secretary, Scott Bessent, also indicated optimism in reaching a deal within a short period, which raised expectations of shipping through the Strait of Hormuz resuming without any disruption.
The Strait of Hormuz is one of the most significant routes for oil transportation in the world. Any improvements in the availability of this route are positive for the global oil supply and tend to weigh on oil prices. The prospect of reduced supply risks prompted traders to sell crude after weeks of gains driven by geopolitical tensions.
Despite the market reaction, analysts said supply risks have not eased completely.
ANZ analysts said, “Gulf exports remained under pressure, with Strait of Hormuz transits only marginally improving from extremely depressed levels. The export disruption story is intact, with Iranian attacks on vessels constraining flows.”
They said that the shipping activity through Strait of Hormuz and Bab el-Mandeb showed little improvement at the start of the week, meaning that the oil exports out of the region are still lower than usual.
The report indicates that while the hope has returned back to the markets, physical supply issues are still restraining the oil supplies.
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Investors await news regarding the ongoing negotiations between the United States and Iran. Though optimism about the diplomatic move was behind the sell-off witnessed on Tuesday, analysts believe that the oil price will remain vulnerable to any developments regarding the negotiations.
Any formal agreement on the normalization of shipping in the Strait of Hormuz can lead to further relief for supplies, putting pressure on oil prices. However, until that happens, geopolitical events along with shipping in the Gulf will be the main forces affecting the oil market.