Oil’s retreat reflects a temporary easing of geopolitical anxiety rather than a fundamental shift in supply risks, leaving prices highly exposed to fresh shocks.
Oil prices fell more than 1% on Monday as traders dialed back risk premiums tied to the Middle East, encouraged by signs of continued diplomacy between the United States and Iran over Tehran’s nuclear programme.
The pullback follows weeks of gains driven largely by geopolitical tension rather than changes in physical supply.
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Brent crude futures slipped 84 cents, or 1.2%, to $67.21 a barrel by 0747 GMT, while U.S. West Texas Intermediate crude dropped 82 cents, or 1.3%, to $62.73. Both benchmarks extended losses from last week, when they declined more than 2% in their first weekly fall in seven weeks, signaling that markets are reassessing the likelihood of near-term disruptions.
The immediate catalyst was renewed engagement between Washington and Tehran. After indirect talks in Oman on Friday, both sides announced that discussions would continue, easing concerns that stalled negotiations could escalate into an open confrontation. Those fears had intensified earlier as the U.S. repositioned military assets in the region, prompting traders to price in the risk of supply interruptions.
“With more talks on the horizon, the immediate fear of supply disruptions in the Middle East has eased quite a bit,” IG market analyst Tony Sycamore said, capturing the prevailing market mood.
The Middle East remains central to global oil security. Roughly a fifth of the world’s oil consumption flows through the Strait of Hormuz, the narrow chokepoint between Oman and Iran. Even a limited disruption there would have outsized consequences for prices, which explains why oil markets tend to react swiftly to diplomatic signals involving Iran and the U.S.
Yet the underlying risks are far from resolved. Iran’s foreign minister warned that Tehran would strike U.S. bases in the Middle East if attacked by American forces, a reminder that the region remains volatile despite the diplomatic opening. Analysts say such rhetoric keeps traders cautious, particularly after a prolonged period of elevated tension.
“Volatility remains elevated as conflicting rhetoric persists. Any negative headlines could quickly reignite risk premiums in oil prices this week,” said Priyanka Sachdeva, senior market analyst at Phillip Nova.
Beyond the Middle East, oil markets are also grappling with shifting dynamics around Russian crude, as Western governments intensify efforts to curb Moscow’s oil revenues linked to the war in Ukraine. The European Commission on Friday proposed a sweeping ban on services that support Russia’s seaborne crude exports, a move that could tighten the logistics underpinning global oil flows, even if outright supply losses remain limited.
The implications are already visible in Asia. Indian refiners, once the largest buyers of Russia’s seaborne crude, are avoiding purchases for April delivery and are expected to remain cautious for longer, according to refining and trade sources. The pullback could help New Delhi advance trade negotiations with Washington, but it also raises broader questions about how Russian barrels will be rerouted and whether alternative buyers can absorb them without price discounts widening further.
“Oil markets will remain sensitive to how broadly this pivot away from Russian crude unfolds, whether India’s reduced purchases persist beyond April, and how quickly alternative flows can be brought online,” Sachdeva said.
At the same time, the broader market backdrop remains complex. Demand expectations are being shaped by uneven global economic growth, central bank interest rate paths, and refining margins that have softened in some regions. While OPEC and its allies continue to manage supply through production curbs, traders are increasingly focused on geopolitical developments as the dominant short-term driver of prices.
Although easing diplomatic tensions has taken some heat out of oil markets for now, the calm looks conditional. Talks between the U.S. and Iran remain fragile, the threat of escalation in the Middle East has not disappeared, and the reconfiguration of Russian oil trade continues to inject uncertainty. Together, these forces suggest that oil prices may remain range-bound but highly reactive, vulnerable to sharp moves as geopolitical signals shift.