Oil prices tumble as US and Iran pause strikes over Strait of Hormuz

Oil prices tumble as US and Iran pause strikes over Strait of Hormuz

Oil prices fell sharply on Monday, as the United States and Iran paused military strikes following two weeks of attacks. The cessation of hostilities over the weekend has raised hopes for a diplomatic solution to de-escalate tensions and restore shipping flows through the Strait of Hormuz.

Brent crude futures declined $3.96, or 4.1%, to $92.82 by 0329 GMT. During the session, Brent briefly slipped below the $90 support level and at one point shed more than 7%. U.S. West Texas Intermediate crude dropped $4.02, or 4.5%, to $85.29 a barrel. Both contracts reached their lowest levels in nearly a week, reversing a three-week upward trend.

The volatility follows a period of escalation that began this month when Iran attacked ships in Omani waters within the Strait of Hormuz, breaking a fragile truce. The conflict subsequently expanded to the Red Sea, where Iran-backed Houthi rebels in Yemen struck Saudi vessels in the Bab al-Mandeb Strait. This disruption hindered exports from Saudi Arabia, the world's top exporter, and pushed Brent crude above $100 per barrel last week for the first time since May.

The U.S. Ambassador to the United Nations, Mike Waltz, stated via Fox News Sunday and other media that President Donald Trump decided to pause U.S. Attacks to provide more time for diplomacy. After 13 days of strikes on sites in the Islamic republic, the U.S. Held fire over the weekend. In turn, Tehran announced it would stop retaliatory attacks on regional neighbors.

Diplomatic efforts appear to be intensifying. Iran's foreign ministry spokesman, Esmaeil Baqaei, noted that talks with Oman regarding the management of the Strait of Hormuz have made progress. Baqaei said these discussions center on common principles and operational mechanisms to ensure safe shipping passage while respecting the sovereign rights of both states. Additionally, reports indicate Pakistan is looking at resuming peace talks between the U.S. And Iran following a push by China.

Despite the pause, the physical movement of oil remains constrained. Shipping data from Kpler showed fewer than 10 commodity vessels passed through the Strait of Hormuz daily over the weekend. Ship traffic through the Bab el-Mandeb Strait also fell on Sunday following Houthi attacks on Saudi oil installations along the Red Sea coast, though a third Chinese supertanker did exit via that route.

Analysts suggest a full recovery of shipping will be gradual. Saul Kavonic, an analyst with MST Marquee, said any rebound in flows is likely to be slow and partial because shippers remain wary and require more confidence in their safety.

The drop in crude prices provided a lift to global financial markets. In India, the Sensex and Nifty snapped a five-session losing streak on Monday. The Nifty 50 had fallen more than 2.3% last week, closing Friday at 23,767. Equity markets in Hong Kong, Sydney, Shanghai, Wellington, and Manila also rose, while Tokyo saw gains despite selling pressure on tech firms.

However, some analysts warn that oil prices could remain elevated due to other geopolitical risks. UOB analysts noted that sustained disruptions would likely persist if the Middle East conflict continues to widen or if Ukrainian drones continue to strike Russian refineries and ships. Ukraine reported hitting several Russian oil sites over the weekend.

Market attention now turns to the Federal Reserve's policy decision on Wednesday. While inflation data has indicated an easing trend, some analysts, including Jenny Zeng of Allianz Global Investors, expect 50 basis points of tightening by year-end despite a likely hold in July.