Key points
- Brent falls for a fourth straight day
- WTI extends losses to a fifth session
- Hormuz talks ease immediate supply concerns
- Refining and shipping risks remain elevated
ISLAMABAD: Oil prices extended their decline on Thursday as expedited Pakistan-led diplomatic efforts to end Iran-US conflict and restore shipping through the Strait of Hormuz raised hopes and eased fears of supply disruptions.
Brent crude futures fell 60 cents, or 0.7 per cent, to $87.24 a barrel, extending losses for a fourth consecutive session.
US West Texas Intermediate (WTI) crude was down 56 cents, or 0.7 per cent, at $81.67 a barrel, marking its fifth straight session of declines.
The latest move marks a sharp reversal from the rally seen earlier this month, when renewed attacks and threats to shipping pushed Brent back towards $90 a barrel and raised fears of a much larger supply shock.
Markets have instead shifted their focus towards diplomacy, particularly discussions involving Iran, Oman and Qatar over arrangements and the latest efforts by Pakistan to end the lingering conflict.
All these efforts hinting at probable peace in the Middle East strengthened the market sentiment that they could eventually result in restoring traffic through the Strait of Hormuz.
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The waterway is one of the world’s most important energy chokepoints, historically carrying roughly one-fifth of global oil and gas shipments.
Current flows have fallen to about one-quarter of their pre-war levels, according to market data cited by multiple media outlets.
Hormuz: the key oil market driver
The prospect of a reopening has encouraged traders to unwind some of the geopolitical risk premium built into crude prices.
Iran and Oman have been discussing arrangements for managing navigation through the strait, including proposals for safer shipping and the eventual clearance of mines.
The discussions have raised expectations that at least some disrupted oil flows could gradually return to international markets. At the same time, US President Donald Trump’s claim of clearing all the mines from the Srait of Hormuz, although not varified independently, raised hopes of the waterway’s clearance.
The decline has accelerated despite the fact that the physical oil market remains tight in several areas.
Reduced tanker movements through Hormuz continue to constrain supplies from major Gulf producers, and attacks on refineries in the Middle East and Russia have added pressure to global fuel markets.
Refined oil market still tense
The diesel market is particularly vulnerable. US distillate inventories have fallen by 2.2 million barrels to 103.4 million barrels, the lowest seasonal level on record, according to Reuters.
That means lower crude prices do not necessarily translate immediately into cheaper diesel and other refined fuels.
Oil; from $90-plus to mid-$80s
The latest decline follows a broad retreat from the levels reached earlier in August.
Brent had moved back above $90 a barrel earlier this month as attacks on shipping and threats surrounding Hormuz intensified.
On August 12, Brent was around $89.63 and WTI at $83.91, before renewed geopolitical tensions pushed prices higher.
Prices subsequently climbed further, but the market reversed after Washington announced additional sanctions against Iran, indicating reliance on economic pressure rather than immediate military escalation.
On August 25, Brent settled at $88.58 and WTI at $82.36, with both benchmarks losing more than 3 per cent as traders interpreted the sanctions as less damaging to physical oil supplies than a renewed military confrontation.
The decline continued into Wednesday, when Brent fell below $87 and WTI moved towards $80 as expectations of a temporary framework for reopening Hormuz strengthened.
Supply risk persists
Despite the price retreat, the market remains highly sensitive to developments around Hormuz.
The six-month US-Iran conflict has severely disrupted regional energy flows, and Iran’s oil exports have fallen sharply.
At the same time, emergency oil reserves and inventories that helped cushion the initial supply shock have been drawn down.
Global oil inventories, including stocks held at sea and on land, have fallen substantially since mid-July.
Refining margins have also remained elevated because fuel production has been hit by disruptions at several refineries.
This leaves the market facing two opposing forces: hopes of renewed oil flows are pushing futures lower, but depleted inventories and vulnerable refining capacity could keep the physical oil prices elevated.
