Oil has fallen by more than 20% from its late-October highs as investors price out geopolitical risk premiums. Supply and shipping data are returning to pre-war levels, but Iran's attacks on tankers and the US midterm elections keep the diplomatic outlook uncertain.
Brent dropped sharply to its lowest levels since August amid comments from Donald Trump that he currently considers a resumption of hostilities in the Middle East unlikely while negotiations are ongoing. Treasury yields resumed their decline, and the US dollar fell by around 0.5% on Monday.
Oil has fallen by more than 20% from its late-October highs as investors continue to price out geopolitical risk premiums. The oil market is returning to pre-war levels.
Supply and shipping return to pre-war levels
Production is recovering. According to a Reuters survey of experts, OPEC oil production rose to 22.87 million barrels per day in October, around 90% of the level seen at the start of the conflict in the Middle East.
China is ramping up its oil imports, with a 9.4% month-over-month increase to 9.88 million barrels per day, levels last seen at the end of February.
Transport costs are falling too. Data from the Baltic Exchange in London shows that chartering a supertanker to carry 2 million barrels from the Gulf of Mexico to Asia fell to $45 million, compared with $79.6 million a month ago.
Iran and the midterms keep risks alive
Yet despite Trump's statements that the chances of a resumption of hostilities are low, Iran continues to attack tankers in the Strait of Hormuz as the situation in Saudi Arabia remains tense. Washington describes Tehran's demands as unrealistic, while Iran is waiting for the White House to change its stance following the US midterm elections.
The results of those elections could make Iran less conciliatory, complicating a diplomatic resolution and potentially leading to an escalation. As a result, the oil market is reacting to positive expectations and signals, although it is still too early to speak of a fundamental change in the situation.
If diplomacy reaches an impasse and hostilities resume, the price per barrel will start rising again. Meanwhile, the recent price peaks have not yet been reflected in US inflation figures, which markets await later on Tuesday.
Source: ActionForex
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