Oil prices saw considerable fluctuations on Monday, initially surging before paring gains, as the market reacted to developments in US-Iran talks regarding the Strait of Hormuz. West Texas Intermediate (WTI) futures, after an early rise of up to 4.5%, settled at $92.60 a barrel, up $0.19 or 0.2%. Brent futures settled up $0.96 or 0.9% at $105.28 a barrel. The initial spike was triggered by President Trump's rejection of an Iranian proposal to reopen the Strait of Hormuz, a critical shipping lane through which a fifth of the world's oil supply, approximately 20 million barrels per day (bpd), passed before recent conflicts. Prices later moderated as Qatari mediators announced plans for separate talks with the US and Iran to de-escalate tensions and potentially facilitate the strait's reopening.
Despite the diplomatic efforts, underlying market fundamentals point to continued tightness. Key gauges of supply tightness, such as Brent's prompt spread (the difference between its two nearest contracts), have widened significantly to over $7 a barrel from less than $1 at the end of last month, indicating strong demand for immediate delivery. Physical crude markets, like Dated Brent in Europe, are also trading at a substantial premium to futures. Global refinery capacity remains constrained, contributing to surging fuel prices, with diesel in particular experiencing record highs due to Middle East and Ukraine war-related disruptions and export bans from Russia and China. The White House is reportedly considering measures to curb high diesel prices, including regulatory relief for broader sales of red-dyed diesel and potentially banning diesel exports, which could lead to US refiners processing less crude and impact the Brent-WTI spread.
Supply disruptions and geopolitical risks continue to fuel market uncertainty. Saudi Arabia has only restored about half the flows through its East-West pipeline, bringing total flows to roughly 3.5 million bpd, following drone attacks earlier in the month. While Middle Eastern crude oil exports, including shipments through the Strait of Hormuz, rebounded in September, they remain below pre-conflict levels. UBS analyst Giovanni Staunovo noted that despite increased vessel traffic, the market remains undersupplied. Furthermore, the war's impact has reduced the availability of very large crude tankers, pushing shipping rates to record highs. Analysts, like Hamad Hussain of Capital Economics, believe that without a decisive end to the conflict, risks remain skewed towards higher oil prices, with Brent already up over 75% this year.
