By: Economy Middle East

Oil prices extended their sharp retreat on Tuesday as investors assessed signs of diplomatic progress between the United States and Iran against continuing disruption to major Middle East shipping routes.

The declines pushed both global benchmarks to their lowest levels in more than a week, adding to Monday’s steep selloff after Washington unexpectedly suspended its latest airstrike campaign against Iran. The pause raised hopes that negotiations could produce a resolution to the conflict and permit more oil shipments to move through the Strait of Hormuz.

Brent crude futures fell 1.06 percent to $84.96 per barrel by 8:30 UAE time, their lowest level since July 20. U.S. West Texas Intermediate crude declined 1.08 percent to $81.72 per barrel, also reaching its weakest level since July 20.

Both contracts had dropped approximately 8 percent during the previous session after the United States suspended its bombing campaign over the weekend. The latest decline showed that traders continued removing part of the geopolitical premium accumulated during the recent escalation.

Talks temper risks

U.S. President Donald Trump said Washington was holding constructive discussions with Iran and that an agreement remained possible. However, he warned that American military strikes could resume if diplomacy failed, while Iran similarly indicated that it could retaliate if negotiations collapsed.

IG analyst Tony Sycamore said the prospect of an exit from the conflict had reduced pressure on oil prices and eased immediate concerns surrounding Houthi attacks against Saudi infrastructure.

He cautioned that conditions remained highly fluid despite the temporary relief.

The latest diplomatic signals followed two weeks of intensified attacks that disrupted global energy flows and drove Brent above $100 per barrel. The pause has changed the market’s immediate direction, but it has not produced a signed settlement or restored normal tanker traffic.

Oil traders are consequently balancing the possibility of a negotiated de-escalation against the risk that unsuccessful talks could lead to renewed strikes, additional infrastructure damage and another rapid increase in crude prices.

Shipping risks persist

Security concerns remained elevated around Bab el-Mandeb, the narrow waterway connecting the Red Sea with the Gulf of Aden. Afrah al-Zouba, foreign minister-designate of Yemen’s internationally recognized Saudi-backed government, said Yemen-based Houthi fighters were seeking to replicate Iran’s control over Hormuz by exerting similar influence at Bab el-Mandeb. 

Marex analyst Edward Meir questioned whether the Houthis possessed the military capability to enforce a comprehensive blockade, particularly because Saudi Arabia would be expected to respond forcefully.

He nevertheless said shipping traffic had declined substantially in both the Red Sea and the Strait of Hormuz. 

Saudi Arabia said it had intercepted drones targeting petroleum-related sites, including facilities in Riyadh. The Kingdom said the drones had been launched from Iraq by Iran-backed armed groups and reserved the right to respond.

Iran-aligned Houthis in Yemen separately said they had targeted the East-West Pipeline, which transports Saudi oil to the Kingdom’s principal Red Sea export terminal at Yanbu. The group described the operation as retaliation for Saudi drone incursions. 

Hormuz flows halve

Physical oil movements through Hormuz remained severely constrained despite the reduction in direct U.S.-Iran attacks.

Barclays analysts said net exports of crude oil and refined petroleum products through the strait averaged 2.9 million barrels per day during the week ending July 24. That represented a decline of more than 50 percent from 5.9 million barrels per day during the preceding week.

The fall indicates that a political pause has not yet persuaded tanker operators to restore normal activity. Shipping companies must consider vessel safety, insurance availability, crew security and the possibility that attacks could resume with little warning.

The reopening of another export route added downward pressure to prices. The Caspian Pipeline Consortium resumed oil loadings at its Black Sea terminal on the Russian coast after operations had been suspended for one week following Ukrainian drone attacks.

Restored loadings improved the immediate supply picture outside the Middle East, partially offsetting concerns about constrained Gulf exports. However, the combination of reduced Hormuz traffic and emerging threats around Bab el-Mandeb means the global system remains exposed to disruptions across two strategically important waterways.

Asian demand weakens

Meir said demand destruction, particularly across Asia, was one of the principal reasons oil prices had not moved even higher during the recent supply disruptions.

Higher crude and fuel costs can reduce consumption by increasing transport, manufacturing and electricity expenses. They can also weaken economic activity in countries that depend heavily on imported energy, limiting their willingness or ability to purchase oil at elevated prices.

The demand effect has provided a counterweight to supply concerns. While reduced Gulf shipments would ordinarily support prices, weaker consumption expectations have prevented traders from pricing the disruption solely as a shortage.

U.S. inventory expectations offered another market signal. A preliminary Reuters poll indicated that American crude oil and gasoline stockpiles probably declined during the previous week, while inventories of distillates, including diesel and heating oil, were expected to increase.

Official inventory data will help indicate whether falling prices are being accompanied by stronger consumption or whether weakening economic demand is beginning to affect petroleum use.

Monday selloff deepens

Tuesday’s decline followed one of the oil market’s sharpest sessions in recent months. Brent settled $8.42 lower on Monday, falling 8.7 percent to $88.36 per barrel and recording its lowest close since July 17.

WTI declined $6.70, or 7.5 percent, to finish at $82.61 per barrel, its weakest settlement since July 16. 

The selloff reversed much of the preceding week’s increase, when Brent moved above $100 as reduced shipments through Hormuz coincided with an expansion of the conflict into the Red Sea.

The escalation had hindered Saudi exports moving through Bab el-Mandeb toward Asian customers. Monday’s suspension of U.S. strikes therefore produced an immediate reassessment of the likelihood that supply interruptions would worsen further.

However, fewer than 10 commodity vessels passed through Hormuz each day during the weekend, according to Kpler data cited by Reuters. Flows were estimated at roughly 15 percent of the approximately 20 million barrels per day normally transported through the route before the conflict.

Volatility remains elevated

The latest movement extends an exceptionally volatile period for energy markets. The U.S. Energy Information Administration said front-month Brent traded between $118 per barrel on April 29 and $72 on June 26 during the second quarter. 

Average daily Brent price movements reached approximately $4 per barrel during April and May, compared with around $1 during the same months of 2025.

The EIA said negotiations and expectations that Hormuz traffic would resume caused Brent to decline by an average of more than $1 per day between May 18 and June 17. Prices generally continued falling after the United States and Iran signed a memorandum seeking to restore shipping, before renewed military strikes pushed them higher again during July. 

The pattern demonstrates why oil has reacted so sharply to each diplomatic and military development. Prices reflect not only current supply volumes but also expectations about whether tankers, refineries and production facilities will operate normally in the coming weeks.

Supply recovery lags

The International Energy Agency’s July Oil Market Report showed that global supply rebounded by 4.1 million barrels per day in June to 98.8 million barrels per day as Hormuz flows partially recovered.

World production nevertheless remained 9.4 million barrels per day below prewar levels. The IEA expects average global supply to decline by 3.7 million barrels per day to 102.6 million in 2026, although that forecast depends on a rapid easing of hostilities. 

Total Gulf exports, including supplies transported through routes bypassing Hormuz, increased by 6.5 million barrels per day in June to 16.1 million. That remained well below the prewar average of 24 million barrels per day. 

The IEA forecasts that global oil demand will decline by 1 million barrels per day in 2026 before expanding by 2 million barrels per day in 2027. It expects the annual contraction to moderate during the second half as seasonal consumption and improving product availability support a recovery from May’s low.

Forecasts remain divided

The Organization of the Petroleum Exporting Countries maintains a stronger demand outlook than the IEA. OPEC forecasts global oil consumption growth of approximately 800,000 barrels per day during 2026 and 1.9 million barrels per day in 2027.

The difference between the forecasts illustrates the uncertainty surrounding the economic consequences of the conflict, reduced shipping flows and high fuel prices.

OPEC reported that its reference basket averaged $89.75 per barrel in June, declining $24.80 from May. Brent futures averaged $84.43, while WTI averaged $81.79.

The organization said hedge funds and other money managers had reduced speculative bullish exposure for a second consecutive month as they anticipated easing Middle East tensions and better supply conditions. Between late May and the week ending June 30, investors sold positions equivalent to 245 million barrels across Brent and WTI futures and options.

Inventories stay tight

Falling prices have occurred despite signs that physical petroleum inventories remain constrained.

The EIA estimated that global crude stocks declined by an average of 5.1 million barrels per day during the second quarter. U.S. commercial inventories moved from above their five-year seasonal average at the quarter’s beginning to their lowest comparable level since 2014 by its end. 

U.S. refineries processed their highest second-quarter crude volume since 2019 as strong margins encouraged elevated production. Gasoline refining margins averaged 60 percent above the previous year, while distillate and jet-fuel margins more than doubled because of tight international product supplies.

American distillate exports averaged a record 1.56 million barrels per day, 30 percent above their five-year average. Jet-fuel exports averaged 356,000 barrels per day, more than twice the five-year level.