Oil Drops, Market Weighs Iran–US Deal
Oil prices weakened as market participants weighed the chances of a US–Iran nuclear deal, as further negotiations were scheduled for this week and US military strength continued to build in the Middle East. The market was trying to balance two risks: the possibility of diplomacy to ease tensions, versus the threat of supply disruptions if the situation escalated.
Brent fell to near US$71/barrel after closing virtually unchanged on Friday, despite US President Donald Trump's suggestion that he was considering a limited military strike against Iran. In Monday's trading, the April Brent contract fell about 0.7% to US$71.28/barrel, while the April WTI contract fell 0.7% to US$66.01/barrel.
From Iran, Foreign Minister Abbas Araghchi said there was a "high chance" of reaching a mutually beneficial diplomatic solution. He also said he would meet with US special envoy Steve Witkoff for talks in Geneva. Throughout the beginning of the year, oil prices rallied despite many projections that the market could potentially be in surplus, as concerns about the US–Iran conflict prompted market participants to place aggressive hedges in the futures and options markets.
However, the primary focus remains on supply risks. If Iranian exports are impacted or there is a credible disruption in the Strait of Hormuz, prices could rapidly repric. Hormuz is a narrow passage through which oil and LNG tankers pass daily; Iran wouldn't even need to shut it down completely to have a significant impact on the global market. Countries such as Saudi Arabia, Iraq, and Kuwait ship oil through this passage, with much of their cargo flowing to Asia. Iran itself pumps over 3 million barrels per day (about 3% of global output), with the majority of its exports going to China.
Interestingly, signals from the market structure are starting to ease. Brent's prompt spread (the difference between the two-month contracts) remains in bullish backwardation, but has narrowed to around 41 cents/barrel on Monday, compared to over US$1 at the end of January. Market participants are assessing indicators such as time spreads, diesel/gasoil inventories, and OPEC discipline to determine whether these tensions are actually leading to a real supply tightening. (asd)
Source: Newsmaker.id
