Oil prices fell a sharp 5 percent on Tuesday to reach two-week lows. The drop is primarily due to the cautious optimism that a recent temporary truce in the conflict between the U.S. and Iran could lead to peace talks, although earlier temporary truce efforts have not succeeded in lasting peace.
Brent crude futures decreased by $4.27 (4.8%) to settle at $84.09 a barrel, while U.S. West Texas Intermediate (WTI) crude fell by $3.35 (4.1%) to close at $79.26. Market analysts say this down-trade is just because of the absence of recent bilateral attacks. But neither side seems to have come to a satisfactory understanding of the causes of the effective closure of the Strait of Hormuz, which in the past was the choke point used by one-fifth of the world’s oil shipping.
Iran has made no public announcement that it is seeking a resumption of the stalled talks, though U.S. President Donald Trum has suggested “good talks” are taking place. Diplomatic sources also say that Oman recently offered the Gulf-backed plan to collect voluntary transit fees to run the Strait of Hormuz. But the Islamic Republic of Iran’s Ministry of Foreign Affairs reportedly rejected this plan, suggesting a temporary solution whereby the vessels would pass through Iranian waters in both directions.
Shipping Disruptions and Global Energy Impacts
The market is being impacted by the continued absence of commercial shipping through the Strait of Hormuz and Houthi attacks in the Red Sea, which are backed by Iran. Saudi Aramco was forced to shut down its 400,000 bpd Jizan oil refinery on July 27 after it came under attack from a weekend missile attack by the Houthis.
These Houthi operations have cut through Bab el-Mandeb Strait, making it a second choke point for worldwide oil transportation. Saudi Arabia is now looking at a new pricing system for crude from Egypt’s Sidi Kerir port to account for higher charges for re-routing crude via the Suez Mediterranean pipeline. There were four days of a record 28 passing vessels at Bab el-Mandeb in recent days, but China has launched direct negotiations with Houthis to ensure the safe passage of its own tankers.
In addition to the Middle East, Ukrainian President Volodymyr Zelenskiy has recently talked about the revival of peace talks with Russia. However, if a settlement is reached in the Ukraine war, sanctions against Moscow may be removed, allowing the third-largest crude producer in the world (after the U.S. and Saudi Arabia, according to the U.S. Energy Information Administration) to ship more crude.
In the near future, the Organization of the Petroleum Exporting Countries (OPEC) and its allies are likely to halt their planned raise in oil production for three months starting in October. The delay is long overdue as the group is involved in complicated negotiations on new production quotas ahead of the return of voluntary market cuts.
