By: Economy Middle east

The global energy market entered February 2026 on a “war footing,” but just 72 hours into the month, the narrative has shifted from an imminent military strike to a diplomatic breakthrough. Oil prices extended their decline on Tuesday as investors recalibrated for a world where U.S.-Iran tensions might actually cool, and a hawkish new direction at the Federal Reserve bolsters the U.S. dollar.

The benchmarks exhibited a steady downward trajectory, following a brutal 4 percent sell-off on Monday. Brent Crude Futures declined by 32 cents, or 0.48 percent, settling at $65.98 per barrel. Meanwhile, U.S. West Texas Intermediate (WTI) saw a decrease of 25 cents, or 0.40 percent, bringing its price to $61.90 per barrel.

These figures represent a significant retreat from January’s highs, where Brent flirted with $72. 

U.S.-Iran talks in Türkiye

The primary catalyst for the current price slump is a sudden “diplomatic pivot.” Over the weekend, President Donald Trump surprised markets by stating that Tehran was “seriously talking” with Washington. This was followed by a formal announcement on Monday that U.S. and Iranian officials are scheduled to resume nuclear negotiations this Friday in Turkey.

For much of January, oil prices carried a “war premium” of $5 to $8 per barrel. Analysts at PVM and ING noted that the mere mention of negotiations has effectively erased that premium. “The market is interpreting this as an encouraging step back from confrontation,” one Singapore-based analyst told Reuters. However, the stakes remain high; Trump warned that while talks are preferred, U.S. warships remain positioned in the region, keeping a floor under prices should the Friday meeting fail.

‘Warsh effect’: A firm dollar pressures commodities

While diplomacy pulled the rug out from under the geopolitical bulls, the Federal Reserve provided a secondary blow. On Friday, President Trump nominated Kevin Warsh to succeed Jerome Powell as Fed Chair in May. Warsh, known for his historically hawkish stance on inflation, is expected to maintain higher interest rates for longer—a direct contrast to the aggressive easing some investors had anticipated.

The nomination has sent the U.S. dollar index to its highest level in over a week. Because oil is denominated in dollars, a stronger greenback makes crude more expensive for international buyers in Europe and Asia, naturally stifling demand. This “Warsh Effect” has triggered a broader commodities sell-off, affecting not just oil, but also gold and silver, which saw massive drops earlier this week.

OPEC+ and the global supply glut

Against this backdrop of cooling tensions, OPEC+ met on Sunday, February 1, and opted to keep its current production quotas unchanged for March. The group, led by Saudi Arabia and Russia, has maintained a cautious stance, freezing planned output increases that were originally scheduled for early 2026.

Despite this restraint, the fundamental outlook for 2026 remains bearish. According to data from Capital Economics and the IEA, the global market is facing a projected surplus of 3 to 3.5 million barrels per day (bpd) this year. Milder-than-expected winter weather in the United States has also slashed demand for heating oil and diesel, with diesel futures tumbling more than 6 percent this week alone.

India-Russia-U.S. triangle

A new variable in the 2026 oil map is the high-stakes trade deal between Washington and New Delhi. On Monday, President Trump unveiled a deal with Indian Prime Minister Narendra Modi that slashes U.S. tariffs on Indian goods in exchange for India halting its purchases of Russian crude.

India, which had been a top buyer of discounted Russian oil since 2022, is now pivotally shifting toward U.S. and potentially Venezuelan supplies. This move is expected to leave more Russian oil “floating at sea” or forced into more opaque “shadow fleet” routes, further complicating global supply dynamics and adding to the sense of a well-supplied market.

Can the $60 floor hold?

Technically, WTI crude has breached several key support levels, including the $63.50 “neckline” of a double-top pattern. Analysts at FX Leaders and Trading Economics suggest that if the U.S.-Iran talks show progress on Friday, WTI could quickly test the psychological floor of $60.00.

For now, the market is in “wait-and-see” mode. The volatility seen in the first few days of February suggests that while the “war premium” is gone, the “diplomacy discount” is still being calculated.