Oil futures rallied about 2% on Tuesday after a sequence of security incidents in and near key shipping lanes heightened fears the diplomatic process aimed at lowering U.S.-Iran tensions might be imperiled.
Brent crude futures settled at $67.33 per barrel, up $1.03 or 1.6%. U.S. West Texas Intermediate (WTI) crude closed at $63.21 per barrel, a gain of $1.07 or 1.7%.
The moves followed a sharp drop on Monday when both benchmarks fell more than 4% after U.S. President Donald Trump said Iran was "seriously talking" with Washington. On Tuesday, however, U.S. military forces shot down an Iranian drone that the military said "aggressively" approached the aircraft carrier Abraham Lincoln in the Arabian Sea.
Separately, maritime sources and a security consultancy reported that a group of Iranian gunboats approached a U.S.-flagged tanker north of Oman in the Strait of Hormuz, the narrow waterway linking the Persian Gulf and the Gulf of Oman. The strait handles most crude exports from several OPEC members - Saudi Arabia, Iran, the United Arab Emirates, Kuwait and Iraq - primarily bound for Asian markets.
Market participants said the incidents fuelled concern that elements within Iran may be attempting to undermine diplomatic progress. "The diplomatic effort to avoid a U.S. military strike in Iran is unravelling... it would appear (elements in Iran) are trying their best to sabotage the process right now," Bob Yawger, director of energy futures at Mizuho, wrote in a market note.
Adding to market nervousness were contrasting signals about the planned talks. The United Arab Emirates urged Iran and the U.S. to use the resumption of nuclear discussions this week to resolve their standoff, while Iran reportedly pushed for the talks to be held in Oman rather than Turkey and for the agenda to be narrowed to two-way nuclear discussions only, casting doubt on whether the meeting will proceed as planned.
Oil futures showed intraday volatility tied to developments on the diplomatic front. Prices climbed further after reports of a settlement that pushed Brent above $68 and WTI above $64 per barrel, but this advance was pared when Trump reiterated that U.S. negotiations with Iran were ongoing. In later trading, Brent was quoted around $68 per barrel and WTI near $63.91 per barrel.
Fundamental supply-side data also provided some support to crude. Sources citing American Petroleum Institute (API) figures said U.S. crude inventories fell by more than 11 million barrels in the prior week, a sizable draw that tends to underpin prices.
Broader geopolitical and trade developments added nuance to market drivers earlier in the session. Oil found additional backing as reports emerged of a U.S.-India trade agreement that raised hopes of stronger global energy demand. At the same time, continued Russian strikes on Ukraine kept market attention on the prospect that Moscow could remain subject to extended sanctions.
President Trump announced a trade deal with India that would reduce tariffs to 18% from 50% in return for New Delhi halting purchases of Russian oil and lowering trade barriers. While such a deal could be bullish for oil demand over time because India is a major importer, energy advisory firm Ritterbusch and Associates cautioned that the near-term effect may be a further discount on Russian barrels, which is unlikely to stop shadow cargoes from finding their way into global markets.
Related conflict-driven risks also weighed on sentiment. Ukrainian President Volodymyr Zelenskiy accused Russia of taking advantage of a U.S.-backed energy truce to build up munitions and then using them to strike Ukraine on the eve of peace talks. An overnight attack reportedly knocked out heating in cities including Kyiv as Ukrainian negotiators traveled to Abu Dhabi for a second round of U.S.-brokered trilateral talks scheduled for Wednesday and Thursday.
Analysts noted that any delay in resolving the Ukraine conflict could keep oil prices elevated by preserving sanctions that restrict Russian oil exports following Moscow's 2022 invasion. According to U.S. Energy Information Administration data cited in market commentary, Russia was the world's third-largest crude producer in 2025, behind the United States and Saudi Arabia. Separately, within OPEC, Iran was identified as the third-biggest crude producer in 2025.
Context and market implications
The combination of security incidents in the Gulf and evolving diplomatic negotiations between Washington and Tehran left traders weighing the balance between a potential return to diplomacy and the threat of further escalation. The reported draw in U.S. crude stocks lent additional technical support to prices, while trade developments and the ongoing conflict in Ukraine contributed to a complex backdrop for oil markets.
Given the concentration of exports through the Strait of Hormuz for several major OPEC producers, any sustained increase in regional tensions would be closely watched for its potential to disrupt flows to Asia and other markets.