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Oil prices fall $2 as Iran-Oman Strait of Hormuz talks raise supply hopes
Oil prices fell as Iran-Oman talks raised hopes of a Strait of Hormuz reopening. Brent and WTI crude dropped as supply fears eased.
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Oil prices fell sharply on Wednesday, with both major oil benchmarks dropping more than $2 a barrel as hopes grew that the Strait of Hormuz could partially reopen. Brent crude futures fell $2.73, or 3.08%, to $85.85 a barrel by 10:12 GMT on Wednesday. West Texas Intermediate (WTI) crude fell $2.21, or 2.68%, to $80.15 a barrel. Both Brent and WTI hit their lowest levels since August 10 earlier in the trading session.
The main reason behind the fall was fresh talks between Iran and Oman over the Strait of Hormuz, which have raised hopes that oil shipments through the important waterway could resume. “That sort of creates some optimism,” Bjarne Schieldrop, chief analyst for commodities at SEB Research, said, according to Reuters.
Oil prices fall
Iran and Oman have been discussing how the Strait of Hormuz could be managed, after the waterway was blocked for almost six months during the conflict. Oman’s foreign minister said he was hopeful that a temporary corridor through the Strait could be announced soon, Reuters reported.
Iran and Oman have held talks on the waterway for several weeks. The Strait of Hormuz is extremely important for the global energy market because about one-fifth of the world’s oil and liquefied natural gas shipments passed through it before the US-Israeli war with Iran began in February.
Strait of Hormuz talks
On Tuesday, Iran and Oman said they had discussed a joint temporary navigational corridor through the Strait of Hormuz. The two countries also agreed to clear mines from the waterway, which could help make shipping through the Strait safer. The market is now showing less fear of a long-lasting supply disruption, according to Ole Hansen, head of commodity strategy at Saxo Bank.
Hansen said the market has moved toward expecting a partial reopening of the Strait, negotiated shipping arrangements and a lower risk of another military escalation, according to Reuters. A successful deal could remove some of the extra price increase caused by geopolitical fears, Hansen said.
In simple terms, oil prices had been getting support from fears that the conflict could keep oil supplies and shipping under pressure. If ships can safely move through the Strait again, some of that supply fear could disappear. However, oil shipments through the Strait of Hormuz are still very limited while the talks continue.
Oil supply concerns
Only five commodity vessels passed through the Strait on Tuesday, according to preliminary data from ship-tracking company Kpler cited by Reuters. That was far below the 10-day average of 15 vessels and also well below shipping levels seen before the war.
There are still some oil shipments moving through alternative arrangements. Two supertankers carrying about 4 million barrels of Saudi crude are heading to China after loading the oil through ship-to-ship transfers off Oman, according to shipping data.
Iran peace talks
At the same time, broader talks aimed at ending the conflict are continuing. Pakistan and Iran made “significant progress” in talks focused on the US-Israeli war with Iran and a possible path toward peace, Pakistan’s interior minister said Tuesday, according to Reuters.
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The US is also continuing to put pressure on Iran. Washington expanded sanctions on Monday aimed at cutting off Iran’s economic lifeline. The US warned that countries continuing to do business with Tehran could face penalties, although Washington said it would not impose those penalties immediately.
Oil price outlook
Separately, Fortune reported that Brent crude was at $87.41 a barrel at 7:15 a.m. Eastern Time, down $2.80 from the previous morning. The oil price was about $20 higher than it was at the same time last year. Will oil prices go up from here? There is no certain answer. Oil prices depend on several factors, with supply and demand being the biggest drivers.
Oil prices and gas
Oil prices can also move quickly when investors become worried about an economic slowdown, war or other major shocks, according to Fortune. Oil prices also matter for drivers because crude oil is the biggest single part of the price of gasoline. The price at a gas station is not only based on crude oil. It also includes refining costs, distribution costs, taxes and the profit margin charged by the gas station.
Even so, crude oil usually makes up more than half of the cost of a gallon of gasoline. This means a sharp rise in oil prices can push gasoline prices higher fairly quickly. But when oil prices fall, gas prices often take longer to come down. This pattern is sometimes called “rockets and feathers” because fuel prices can rise quickly but fall more slowly.
Oil prices can also affect natural gas prices indirectly because both are major sources of energy. If oil prices rise sharply, some industries may switch from natural gas to oil in areas where that is possible. That can increase demand for natural gas. For now, the key factor for oil markets is the Strait of Hormuz. If Iran and Oman reach a deal that allows more ships to pass safely, concerns about oil supply disruptions could ease further. But shipping through the Strait remains far below normal levels, so the oil market is still watching the talks closely.
