Oil prices fell sharply on Thursday after the U. S. and Iran agreed to hold talks in Oman on Friday. The announcement eased tensions in the Middle East and allayed fears of a global supply disruption, triggering a decline of more than 3% in the major benchmark indices.
Brent traded at 67.13 dollars per barrel, down 3.35%, while West Texas Intermediate (WTI) crude fell to 62.91 dollars, down 3.42%. Traders interpreted the diplomatic rapprochement as a sign of lower risk in the region.
The Strait of Hormuz, under the market’s magnifying glass
Approximately one-fifth of the world’s crude oil consumption transits through the Strait of Hormuz, an extremely important sea passage between Oman and Iran. A large part of the exports of OPEC members OPEC MEMBERSmembers, such as Saudi Arabia, the United Arab Emirates, Kuwait, Iraq and Iran, depend on this route, so any threat in the area usually has an immediate effect on oil prices.
The start of talks between two historically confrontational powers such as the U.S. and Iran is helping to stabilize risk perception, although analysts warn that uncertainty still persists.
Volatility spikes interest in WTI contracts
The lower tension has momentarily reduced the geopolitical risk premium, however, volatility levels remain elevated. Proof of this is the record trading of WTI Midland contracts in Houston during January, driven by instability in the Middle East and the readjustment in supply routes.
According to experts at UBS and Aegis Hedging, the market remains in cautious mode, assessing whether the path will be towards diplomacy or further escalation.
Global oil supply realignment
On the trade front, Russia this week extended discounts on its crude oil exports to China, in an attempt to compensate for the loss of sales to India. This decision followed an agreement between India and the United States to curb the purchase of Russian crude, reconfiguring the energy map in Asia.
Argentina is emerging as a new major player in the medium term. Analysts project that its energy trade surplus could reach between US$8.5 billion and US$10 billion in 2026, driven by the production from Vaca Muerta.
What to expect for oil prices?
With the start of diplomatic talks and a temporary easing of tensions, oil prices could stabilize in the short term. However, the fragility of the balance in the Middle East, the decisions of the producing countries and strategic movements between powers will continue to set the pace of the global energy market.
Source: Reuters