Oil declines on Iran deal optimism, but supply concerns keep market tense

Oil prices fell for a second consecutive session as signals of possible progress in US-Iran negotiations raised hopes that disrupted Middle Eastern supply flows could gradually resume. The decline followed an announcement from former US President Donald Trump indicating a temporary pause in “Project Freedom,” an initiative aimed at assisting vessels stranded in the Strait of Hormuz.

Brent crude dropped by $4.57, or 4%, to settle at $109.87 per barrel, while June WTI futures declined by $4.15, or 3.9%, closing at $102.27 per barrel. The downward trend continued into Wednesday trading, with Brent for July delivery at $106.01 per barrel, down 3.51%, and June WTI at $98.40 per barrel, lower by 3.78%.

Diplomatic signals ease immediate pressure

The recent price correction was triggered by indications of a possible diplomatic breakthrough. Trump stated that the US would temporarily suspend efforts to escort ships through the Strait of Hormuz to assess the potential for a comprehensive agreement with Iran.

Despite this shift, the broader US blockade on Iranian ports remains in place, suggesting that supply disruptions are still unresolved. US officials also confirmed the conclusion of “Operation Epic Fury,” signaling a pause in direct military escalation for the time being.

Recovery in supply expected to be gradual

While the pause in naval operations has improved market sentiment, analysts caution that any recovery in supply flows will take time. The disruption in the Strait of Hormuz has left over 1,550 commercial vessels and approximately 22,000 sailors stranded, underlining the scale of the logistical challenges.

Even if negotiations succeed, factors such as high insurance costs, rerouting issues, and damaged supply chains are expected to delay a full normalization of trade.

Market remains elevated despite pullback

Although prices have corrected this week, oil remains significantly higher compared to pre-conflict levels. Brent is still about 50% above prices seen before the war began in late February, after recently reaching its highest levels since March 2022.

The recent decline also reflects profit-taking by traders following weeks of sharp volatility, with many reducing their market exposure.

Supply risks continue to support prices

Despite softer sentiment, underlying supply concerns persist. Recent US industry data showed a decline of 8.1 million barrels in crude inventories last week, potentially marking the largest weekly draw since mid-February if confirmed.

Overall, while diplomatic developments have eased immediate pressure, the oil market remains highly sensitive, with ongoing supply risks keeping prices supported despite the recent downturn.

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