Oil Prices Steady as Traders Balance Diplomatic Progress With Physical Shortages

Oil prices were flat in early Asian trade on Thursday as tentative signs of diplomatic progress between Washington and Tehran were offset by continued and intensifying supply tightness.

At the time of writing, WTI was trading at $91.38, up just 0.1%, while Brent was up 0.04% at $94.97.

Oil prices remain significantly lower than where they had started the week after negotiations fell apart over the weekend. Now, optimism around a potential peace deal appears to be growing, with the White House describing recent negotiations as “productive” and signaling that further discussions could take place within days.

Reports that China’s Foreign Minister told his Iranian counterpart to open the Strait of Hormuz added to hopes that oil may soon flow freely through the waterway.

The U.S. naval blockade has so far been successful in halting Iranian-linked shipping passing through the Strait, pressuring Iran to return to the negotiating table.

At the same time, reports of an Israel-Lebanon ceasefire may help cool tensions in the region and increase the likelihood of successful negotiations between Iran and the U.S.

Despite the improving geopolitical sentiment, physical markets remain extremely tight with fuel shortages starting to bite around the world. Importantly, a peace deal and the reopening of the Strait of Hormuz will do little to ease shortages in the near term.

Estimates vary, but even for the infrastructure in the Middle East to recover will likely take months, then the shut-in production has to come back online, and ultimately, confidence in the region must be restored.

In the meantime, U.S. crude exports have surged to record levels as buyers in Asia and Europe scramble to replace missing Middle Eastern barrels. This scramble for alternative barrels will, in turn, increase prices around the world.

Ultimately, traders remain torn between fragile diplomatic optimism and an ever-tightening supply picture.

By Josh Owens for Oilprice.com

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