Crude oil experienced its sharpest weekly decline in months on Friday, Ole S. Hansen, Saxo Bank’s Head of Commodity Strategy, said in a report sent to Rigzone that day, highlighting that Brent and WTI both lost close to 13 percent.
The reduction in prices came as investors “increasingly priced in the possibility of a negotiated settlement between Washington and Tehran”, Hansen outlined, adding that the prospect of an end to the conflict, combined with recovering Middle East crude flows, “raised hopes that the extraordinary supply disruptions and elevated energy prices seen this year could gradually unwind”.
Hansen pointed out in the report that Brent briefly approached its 200-day moving average near $93.55 before rebounding towards $100 ahead of the weekend, “as traders reassessed the likelihood of a swift diplomatic breakthrough”.
“The recovery reflected growing recognition that the path towards a comprehensive agreement remains long and uncertain,” Hansen stated.
“Iran, whose oil exports have fallen close to zero, is demanding an end to the U.S. naval blockade, sanctions relief, and the release of frozen assets before agreeing to fully reopen the Strait of Hormuz,” he added.
“Meanwhile, renewed tanker incidents and persistent security concerns underline the risks still facing regional shipping,” he continued.
“Importantly, the physical oil market is showing signs of improvement, although the recovery remains uneven,” he went on to state.
Hansen noted in the report that crude exports from the Gulf have recovered significantly from their wartime lows, “helping ease pressure on crude availability and physical premiums”. He warned, however, that the situation for refined products “remains considerably tighter”.
The Saxo Bank Head of Commodity Strategy highlighted in the report that Middle East refinery operations and product exports remain well below pre-war levels, “leaving global diesel and jet fuel markets exposed to tightness and elevated prices”.
“This explains why refined product prices and crack spreads have generally held up better than crude, despite the sharp decline in benchmark oil prices,” he said.
“The distinction matters because lower crude prices will not translate fully into lower transport and industrial fuel costs until refinery production and product trade flows recover,” he added.
The political dimension adds another layer of uncertainty, according to Hansen.
“While Trump’s weakened domestic position may increase incentives to pursue a diplomatic solution, foreign policy and military decisions remain largely within presidential control,” he said.
“A failed negotiation or renewed escalation could therefore quickly restore part of the geopolitical risk premium,” he added.
“For now, the oil market is increasingly discounting a more peaceful future, while the physical market continues to reflect the considerable obstacles standing in the way of normalization,” he continued.
In a HSBC report sent to Rigzone on Friday, analysts at the company, including Senior Global Oil and Gas Analyst Kim Fustier, highlighted that Brent fell by as much as 20 percent from $117 per barrel late last week before recovering to the high $90s.
The move unwound “the geopolitics driven circa $15 per barrel rally in the second half of October,” the analysts pointed out.
“In our view, the probability of renewed U.S.-Israeli strikes on Iran has declined following the U.S. midterm elections, but it has not disappeared,” they added.
“Oil prices remain highly sensitive to geopolitical headlines despite broadly stable Middle East exports and little change in underlying fundamentals,” they continue.
The HSBC analysts warned that risks from Iran and its proxies remain material, adding that tanker attacks reached a wartime high in October.
“The probability of a U.S.-led escalation may have fallen, but there remains scope for Iran or its proxies to intensify the conflict,” they said.
The HSBC analysts also warned that the market now has less protection against another supply loss.
“Global inventories fell circa 510 million barrels between end-Feb and end-Sep, while September’s modest 10 million barrel headline draw concealed a 113 million barrel decline in onshore stocks,” they said.
“A renewed two to three million barrel disruption from tanker or infrastructure attacks would return the market to deficit and put upward pressure on prices,” they added.
“Gulf crude exports have recovered, but persistent security risks and low inventories leave oil price risks skewed to the upside in the very near term, before new bypass capacity starts to ease crude tightness from early 2027,” they continued.
In another oil and gas report sent to Rigzone on Friday, Macquarie Strategists, including Macquarie Energy Strategist Walt Chancellor, highlighted that oil prices had dropped “sharply” in recent days, “with weakness accelerating immediately following the U.S. midterm elections”.
“Simplistically, we view this as the reversal of substantial risk premium that had accrued across September and October despite resilient Middle East flows and rapidly normalizing global oil balances,” the strategists noted.
“In light of the U.S. midterms”, the strategists offered several “summary views” relating to the Iran conflict.
“The magnitude of Democratic gains requires a re-assessment of the war, which we see as a generally dovish/bearish but not determinative development,” the strategists said, outlining one of these views.
Offering another view, the strategists noted that, “while U.S. escalation during the ‘lame-duck’ session of Congress may offer modest political expediencies or tactical advantages, as before” they “do not see a grand strategic imperative for U.S. strikes immediately following the midterms”.
“Escalation scenarios, now or later, remain tricky for the U.S., imperiling energy flows and regional infrastructure further, and potentially entrenching the conflict more deeply in a challenging domestic legislative and political landscape,” they added, outlining another view.
“We take diplomatic efforts seriously, both from a regional and U.S.-Iran perspective, but here too we see a difficult path to a conclusive outcome regarding Iran’s nuclear program. MoU 2.0 would be clearly bearish but might not last or lead to a lasting solution to the conflict,” the strategists warned in another view.
“Although potential for sharp deviations from the current trend of resilient Middle East supply remain pronounced in the near-term, we continue to anchor our base case on a measured increase in Middle East supply through 2027,” the strategists went on to note in a separate view.
“To date, flows appear to be outperforming our expectations, bringing balance back to the global oil market ahead of schedule,” they added.
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