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Oil prices fell nearly 5 per cent on Thursday as US-Iran tensions de-escalated and traders dialled back their bets on military action against one of the world’s major crude producers.
Brent crude, the international benchmark, dropped by $3 a barrel to $63.45, erasing most of this week’s gains.
The protests in Iran, fresh US tariffs on buyers of Iranian oil and the prospect of a US intervention after reports of a heavy death toll all helped crude prices break above their 200-day moving average to as high as $66.82 a barrel earlier this week.
Iran produces about 3 per cent of the world’s oil and exports 2mn barrels of crude a day, almost all to China. It also controls the Strait of Hormuz, the narrow waterway through which roughly 30 per cent of the world’s seaborne oil flows each day, and a choke point that regularly captures the market’s attention during periods of regional tension.
But prices retreated sharply after US President Donald Trump’s remarks on Wednesday and continued to slide as traders digested conciliatory comments from Iran’s foreign minister, Abbas Araghchi. He told Fox News he was “confident” that “there is no plan for hanging at all”.
Arab governments believe intense diplomatic efforts to dissuade Trump from striking Iran have reduced tensions in the Gulf.
Traders said the market’s focus had rapidly shifted away from geopolitical risk and towards signs of ample supply, even as the situation in Iran remained volatile.
On Wednesday, the US Energy Information Administration reported that US crude inventories rose by 3.4mn barrels in the week to January 9, roughly double analysts’ expectations. Traders also anticipate Venezuela will imminently resume oil exports after a US naval blockade imposed in mid-December.
“Oil prices are resetting to reflect the continued and sobering narrative of a market looking at a near-term future of oversupply,” said John Evans of PVM Energy in a note. He added that prices would continue to “scamper forth on global flashpoints [ . . .] only to be keenly corrected” by evidence of sufficient supply.
Analysts at Energy Aspects said this week’s rally had already priced in much of the risk of US action against Iran. Even if Washington were to intervene, they added, prices could still fall if Iranian oil exports were left intact: “The stage may be set for a classic ‘sell the fact’ reaction”.
