Oil prices declined on Friday as investors weighed the possibility of a phased agreement between the United States and Iran that could reopen the Strait of Hormuz and restore more energy shipments through one of the world’s most important oil transit routes.
The decline followed a sharp rally in the previous session when renewed attacks around Saudi Arabia pushed geopolitical supply concerns back to the forefront of the market.
Brent crude oil had settled Thursday at $106.60 per barrel, gaining $3.52, or 3.4 percent and recording its highest closing level since September 15.
U.S. West Texas Intermediate crude rose $2.45, or 2.7 percent to settle at $94.61 per barrel.
Both benchmarks had climbed by about 5 percent at their session highs before surrendering part of those gains as reports emerged that Washington and Tehran were discussing a possible framework for reducing hostilities.
The negotiations have put the Strait of Hormuz at the centre of efforts to resolve the nearly seven-month conflict.
Under a phased arrangement being discussed by both sides, Iran could reopen the strategic waterway while the United States eases or removes its economic blockade of Tehran.
Such an agreement could have significant consequences for the global energy market.
Before the conflict, roughly one-fifth of global oil and gas shipments passed through the Strait of Hormuz, making unrestricted navigation through the waterway critical to supplies from major Middle Eastern producers.
Iran’s restrictions on shipping have disrupted normal trade flows and forced producers and traders to depend more heavily on alternative export routes.
The prospect of restoring traffic through Hormuz therefore represents one of the most significant potential bearish developments for oil prices since the conflict began.
However, negotiations remain uncertain.
Washington wants Iran to restore freedom of navigation through the strait, while Tehran is seeking an end to the U.S. economic blockade and relief from the financial pressure it has imposed on the Iranian economy.
Neither side wants to surrender its principal source of leverage before receiving concessions from the other, complicating efforts to establish the sequence in which any agreement would be implemented.
The possibility of a diplomatic breakthrough is competing with continuing security threats elsewhere in the region.
Oil prices surged on Thursday after Saudi Arabia intercepted six ballistic missiles fired by Yemen’s Iran-aligned Houthi movement.
The missiles targeted areas including Taif and Yanbu, the latter being particularly important to energy markets because it serves as a major Red Sea oil-export hub.
The attacks renewed concerns that Saudi energy infrastructure and alternative export routes could remain vulnerable even if progress is made over Hormuz.
Saudi Arabia has increasingly relied on its East-West pipeline to move crude from production areas in the east of the country to Yanbu on the Red Sea, allowing shipments to bypass the Strait of Hormuz.
The pipeline recently resumed operations following earlier attacks, although restoration of its full capacity is expected to take time.
The combination of attacks on Saudi infrastructure and restrictions around Hormuz has left the oil market unusually sensitive to political and military developments.
Prices have consequently recorded sharp movements in both directions as traders respond to changes in diplomatic expectations and threats to physical supply.
Thursday’s trading illustrated that volatility.
Brent initially surged as Saudi Arabia came under attack before giving up part of its gains after reports of the U.S.-Iran negotiations emerged.
The same diplomatic development is now placing downward pressure on crude as traders assess whether negotiations could eventually restore a significant volume of Middle Eastern energy exports.
Iran has indicated that it could reopen Hormuz if Washington reduces military pressure and lifts its blockade.
Tehran has previously suggested that the waterway could be reopened relatively quickly once an acceptable agreement is reached.
A reopening would reduce pressure on Gulf exporters and could lower shipping and insurance costs that have increased substantially since the conflict disrupted normal tanker movements.
It could also reduce the geopolitical premium that has helped keep Brent crude above $100 per barrel.
Nevertheless, the market remains vulnerable to renewed price increases because no final agreement has been reached.
Further attacks on Saudi energy infrastructure, deterioration in U.S.-Iran negotiations or additional restrictions on shipping could quickly reverse the current decline.
For oil traders, the immediate question has shifted from whether Washington and Tehran are communicating to whether both sides can agree on the order and scope of concessions necessary to reopen Hormuz.
Until that happens, crude prices are likely to remain caught between two powerful forces: the prospect of recovering Middle Eastern supply and the continuing risk that the conflict causes further disruptions to the world’s oil infrastructure.
