Oil prices moved sharply lower on Monday after Washington and Tehran paused offensive operations over the weekend, prompting market participants to unwind a geopolitical risk premium that had pushed crude to multi-month highs last week.
As of 20:19 ET (00:19 GMT), Brent futures were down 5.5% at $91.44 a barrel, having briefly fallen below $90 earlier in the session. U.S. crude futures (WTI) eased 3.1% to $89.31 a barrel.
Brent had briefly reached $100 a barrel last week amid concerns that the conflict had expanded beyond the Strait of Hormuz to the Red Sea, an escalation that threatened crude exports from major Middle Eastern producers. Those immediate supply worries were pared back after the United States announced a pause to its bombing campaign following 13 consecutive nights of strikes, saying it would allow more time for diplomatic efforts after weeks of escalating exchanges between the two sides.
The U.S. move was met with a reciprocal signal from Tehran. An Iranian official told Reuters that Iran would suspend retaliatory attacks while the U.S. pause remained in place. Both sides, however, cautioned that they remained prepared to resume military action if negotiations collapse.
Market participants also took encouragement from reports on Friday that China was attempting to revive stalled peace talks between Washington and Tehran. Those reports fed expectations that the confrontation could move back toward diplomacy after a period of sustained military escalation.
IG senior market analyst Tony Sycamore said improving prospects for diplomacy - including the possibility of returning to the previously agreed memorandum governing the Strait of Hormuz - had led investors to pare back some of the geopolitical premium embedded in crude prices.
Shipping and supply buffers keep risks on the table
Despite the easing of direct hostilities, traders remained cautious because shipping disruptions persisted. Over the weekend, fewer commodity vessels transited the Strait of Hormuz each day, and traffic through the Bab el-Mandeb Strait slowed after Houthi attacks on Saudi oil facilities.
Analysts at ANZ said the market has so far absorbed those disruptions through several mechanisms: lower crude imports by China, emergency releases from strategic stockpiles, and alternative export routes that enable some Saudi crude to bypass the Strait of Hormuz. The bank warned, however, that these buffers are being increasingly strained as strategic reserves are drawn down, commercial inventories tighten and risks to shipping through the Red Sea and Bab el-Mandeb remain.
That combination - a partial diplomatic thaw reducing near-term risk premiums, alongside persistent logistical threats and shrinking inventory cushions - leaves oil prices vulnerable to renewed gains should supply disruptions intensify or diplomatic efforts falter.
Implications for markets and participants
Investor behavior in recent days illustrates how swiftly geopolitical risk can be priced into, and then out of, commodity markets. The pullback in crude prices reflects a reassessment of immediate supply threat rather than a resolution of underlying vulnerabilities to shipping routes and inventory levels.
For market participants and commodity-dependent sectors, this means volatility may persist as traders balance the improvement in diplomatic signals with the ongoing potential for shipping interruptions and tightening commercial stocks.