By: Economy Middle East

Oil prices extended their decline on Thursday as renewed diplomatic efforts raised expectations that more crude could eventually move through the Strait of Hormuz, easing one of the most significant supply disruptions facing global energy markets.

Brent crude futures fell 0.82 percent to $86.23 a barrel at 06:31 GMT, putting the global benchmark on course for a fourth consecutive session of losses. U.S. West Texas Intermediate crude declined 0.91 percent to $81.48 and was heading for a fifth day of declines. 

The latest retreat follows several sessions in which traders increasingly shifted attention from military escalation toward negotiations over regional shipping and the possibility of restoring more oil flows.

Iran and Oman are working to finalize arrangements governing the Strait of Hormuz after Iran’s Revolutionary Guards said the two sides had agreed on how control of the waterway and related revenues would be shared.

The strait carried oil and natural gas volumes equivalent to about one-fifth of global consumption before the U.S.-Israel war with Iran began on February 28. Oil flows subsequently fell to roughly one-quarter of their pre-war level.

Qatar’s Prime Minister Sheikh Mohammed bin Abdulrahman Al Thani is also due in Tehran as Doha seeks to revive diplomatic efforts to end a conflict that is approaching the six-month mark. 

The United States has halted attacks on Iran for about a month and shifted toward greater economic pressure, reinforcing expectations among some investors that Gulf supply disruptions could ease.

However, substantial disagreements remain between the parties over the conditions required to end the conflict. Iran has continued to use pressure on Gulf shipping as leverage over the strategically important waterway. 

Iranian officials have also maintained that the strait will not fully reopen unless Washington meets commitments associated with an interim ceasefire agreement reached in June that subsequently unraveled.

Shipping remains constrained

Actual maritime traffic has shown only a modest improvement.

Ten commodity vessels moved through the Strait of Hormuz on Wednesday, up from eight a day earlier but still below the 10-day moving average of around 15, according to Kpler data cited by Reuters. 

Traffic remains far below pre-war energy flows. The U.S. Energy Information Administration estimates that oil moving through Hormuz averaged 21.6 million barrels per day during the fourth quarter of 2025, before falling to 14.9 million bpd in Q1 2026 and only 4.9 million bpd during Q2. 

Crude oil and condensate flows alone dropped from 15.9 million bpd in Q4 2025 to 3.7 million bpd in the second quarter of 2026.

LNG shipments were hit even harder, falling from 10.5 billion cubic feet per day to just 0.8 billion cubic feet per day over the same period. (

The scale of those declines explains why relatively small diplomatic developments continue to generate large oil-price reactions.

The EIA describes Hormuz as one of the world’s most important oil chokepoints because alternative routes can handle only a fraction of the crude normally transported through the waterway.

Before the latest conflict, total oil flows through the strait averaged 20.9 million bpd in the first half of 2025, equivalent to about 20 percent of global petroleum liquids consumption and approximately one-quarter of worldwide maritime oil trade.

Around 89 percent of crude oil and condensate passing through Hormuz went to Asian markets during H1 2025. China, India, Japan and South Korea together accounted for 74 percent of those flows.

Saudi Arabia and the UAE have pipelines capable of bypassing the strait, but their combined available alternative capacity was estimated at about 4.7 million bpd before the conflict.

Oil buffers shrink

The falling crude price also masks continuing tightness in the physical market.

The International Energy Agency’s August Oil Market Report said global observed oil inventories fell by another 69 million barrels in July as disruptions reduced exports from the Gulf and Caspian regions. 

Total observed stocks fell below 7.9 billion barrels for the first time since April 2025 and were down approximately 410 million barrels from the start of the war through the end of July.

That represents an average draw of about 2.7 million bpd. 

The IEA now expects the global oil balance to show a deficit of about 1.8 million bpd during the third quarter, more than double the roughly 800,000 bpd deficit it estimated a month earlier.

The agency warned that previously available inventory buffers are being rapidly depleted, increasing the importance of restoring normal flows through Hormuz. 

Production has nevertheless started recovering from the severe losses recorded earlier in the conflict.

The IEA estimates global oil supply increased by 2.4 million bpd in July to 101.5 million bpd, although that remained 6.3 million bpd below its year-earlier level. 

Gulf production increased by 2.5 million bpd during July to 23.9 million bpd after rising 3.7 million bpd in June.

Even after those gains, regional production remained 8.3 million bpd below pre-war levels. Gulf exports also fell by 2.1 million bpd during July to around 15 million bpd as the strait again became effectively closed and attacks on tankers and infrastructure disrupted shipping. 

The IEA now forecasts global supply will decline by an average 4.3 million bpd in 2026 to around 102 million bpd before rebounding by 8.3 million bpd in 2027.

Demand takes hit

The disruption has also reduced consumption, limiting some of the upward pressure that otherwise might have resulted from such a large supply shock.

The IEA expects worldwide oil demand to decline by 1.6 million bpd during 2026, a considerably weaker outlook than it published a month earlier. 

Demand is estimated to have contracted by 4.9 million bpd during Q2 and is forecast to fall another 2.8 million bpd year on year during the third quarter before returning to growth in the final three months of 2026.

Elevated fuel prices, reduced product availability and disruptions to international supply chains have all weighed on consumption.

For 2027, however, the IEA expects oil demand to rebound by 2.4 million bpd as supply conditions and economic activity normalize. 

The weaker demand outlook has helped prevent crude prices from fully reflecting the scale of supply removed from the market.

OPEC+ restores supply

OPEC+ is also gradually restoring previously withheld production as the market adjusts to disrupted Gulf output.

Saudi Arabia, Russia, Iraq, Kuwait, Kazakhstan, Algeria and Oman agreed this month to raise their combined September production target by another 188,000 bpd. The move completes the planned return of a 1.65 million bpd layer of voluntary cuts introduced in 2023.

The producers emphasized that future decisions will continue to depend on market conditions and compliance with existing production commitments.

The group retains the ability to pause or alter its supply policy if market conditions change, while an older layer of approximately 2 million bpd of cuts remains in place through the end of 2026.

The seven producers are scheduled to meet again on September 6 to review conditions.

Diesel market tightens

Crude supply is only part of the market’s current challenge.

ANZ’s Hynes highlighted growing pressure on diesel supplies as refinery disruptions linked to both the Middle East conflict and the Russia-Ukraine war restrict global production.

Middle Eastern refineries have sustained damage during the regional conflict, while Ukrainian attacks have disrupted Russian refining capacity and reduced exports from one of the world’s major suppliers of diesel. 

The IEA said global refinery throughputs reached 80.9 million bpd in July but remained almost 5 million bpd below their level a year earlier.

Diesel exports from Russia, the Middle East and Asia were down approximately 1.3 million bpd year on year, equivalent to about 20 percent of global seaborne diesel trade. Jet fuel exports from those regions fell by roughly 670,000 bpd, or 34 percent of seaborne trade. 

U.S. stocks decline

The pressure is increasingly visible in U.S. fuel inventories.

The Energy Information Administration’s latest Weekly Petroleum Status Report showed distillate inventories, which include diesel and heating oil, declining by 2.2 million barrels in the week ending August 21 to 103.4 million barrels. 

Hynes described that as the lowest U.S. distillate inventory level recorded for this time of year.

The distinction between crude and refined products is increasingly important for the direction of energy prices.

Diplomatic progress around Hormuz can quickly lower the geopolitical premium embedded in Brent and WTI because traders anticipate more crude reaching the market. But damaged refineries, depleted inventories and constrained product exports cannot necessarily recover at the same speed.

That leaves diesel and other refined fuels vulnerable even if crude oil prices continue to retreat.

War premium narrows

Oil markets have already demonstrated how rapidly expectations surrounding Hormuz can move prices.

Brent traded as high as $105 a barrel on July 23 after renewed tanker attacks and another decline in shipments through the waterway. 

By August 25, Brent had settled at $88.58 as investors reacted relatively calmly to expanded U.S. sanctions on Iran and increasingly viewed diplomatic and economic pressure as less immediately disruptive to physical supply than renewed military escalation.

It fell again to $87.84 in the following session as Iran-Oman discussions over the strait continued.

Thursday’s move to $87.43 extends that repricing.

The decline suggests traders are gradually reducing the risk premium attached to a prolonged closure, even though actual vessel traffic, refinery availability and inventories show that the physical market remains far from normal.

Talks hold key

Qatar’s renewed mediation could therefore become an important catalyst for the next major move in crude.

Doha previously helped facilitate the June ceasefire and is seeking to revive negotiations while calling for freedom of navigation and a return toward pre-war shipping conditions in Hormuz.

Iran and Oman are simultaneously discussing practical arrangements for managing the waterway, including navigation and control, although final details remain under negotiation. 

For oil markets, the distinction between diplomatic progress and physical normalization remains critical.

A credible agreement capable of restoring sustained tanker traffic could release more Gulf crude and further erode the war premium embedded in prices. Failure to resolve the underlying U.S.-Iran dispute, renewed attacks or prolonged restrictions through the strait could reverse that move quickly.