Oil falls for third day on Hormuz Strait negotiations

World oil prices are declining for the third straight session amid new Iran-Oman negotiations on partially restoring shipping through the Strait of Hormuz. Brent fell below $87 a barrel, while U.S. WTI is trading near $81.

According to Bloomberg, since the beginning of the week, Brent has lost about 8%. The market is pricing out the geopolitical premium as the risk of a renewed escalation around the key oil supply route from the Persian Gulf has somewhat eased.

Iran and Oman discuss a temporary corridor

Iranian Foreign Minister Abbas Araghchi and his Omani counterpart Badr Albusaidi discussed a phased mechanism that would create a basis for restoring safe vessel traffic through the Strait of Hormuz.

The first stage could be the creation of a temporary joint navigation corridor. At the same time, Iran and Oman are planning a joint project to clear mines from the strait. Later, the parties will need to agree on a permanent route, vessel traffic management rules, information exchange, and the provision of navigational and security services.

Iranian Deputy Foreign Minister Kazem Gharibabadi said that negotiations on a permanent route could last another 30-60 days. So the full opening of the strait is not yet on the table, but the very fact of a concrete interim plan being put forward was seen by the market as a signal of decreasing risks.

Market less afraid of a renewed escalation

Oil began to fall sharply at the beginning of the week. An additional factor was the new U.S. sanctions campaign against Tehran. Despite Washington's tough rhetoric, the announced measures turned out to be less aggressive toward Iran's key trading partners than the market had feared.

In particular, Washington has not yet imposed the harshest restrictions on major buyers of Iranian oil, including China. This lowered expectations of an immediate reduction in global supply and added to the fall in oil prices. The day before, WTI and Brent had already posted their biggest daily declines in about three weeks.

At the same time, the situation in the Strait of Hormuz remains a key risk for the oil market. Before the conflict, a significant portion of the world's oil supply from Persian Gulf countries passed through this route, so even a partial restoration of stable shipping could substantially affect prices.

Despite the current decline, oil is still more than 40% more expensive than at the beginning of the year. The main reason for this increase was the conflict between the U.S. and Iran, which has significantly complicated energy supplies from the region.

Based on materials from: Bloomberg, The Wall Street Journal