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.

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.

AI is no longer a distant efficiency tool for private credit portfolios; it is emerging as a direct threat to the revenue foundations of one of the market’s most heavily financed borrower classes.

Private credit markets are confronting a new and potentially structural risk as artificial intelligence tools begin to encroach on the core business models of software companies, a sector that has been central to the industry’s explosive growth over the past five years.

What was once viewed as a stable, cash-generative borrower base is now under fresh scrutiny, as investors grapple with the possibility that AI could compress margins, disrupt pricing power and weaken debt-servicing capacity across large swathes of private credit portfolios.

The latest bout of anxiety was triggered last week after Anthropic unveiled a new generation of AI tools capable of performing complex professional and enterprise-level tasks. These are services that many software companies currently monetize through subscriptions or licensing fees. The announcement sparked a sharp sell-off in publicly listed software data providers and quickly spilled over into private markets, where concerns are harder to quantify but potentially more damaging.

According to a CNBC report, asset managers with large private credit franchises bore the brunt of investor unease. Ares Management fell more than 12% over the week, Blue Owl Capital dropped over 8%, and KKR slid close to 10%. TPG lost about 7%, while Apollo Global and BlackRock also declined. The broader equity market was comparatively calm, underscoring that investors were reacting specifically to perceived risks within private credit rather than to a general market shock.

At the heart of the concern is the private credit market’s deep exposure to software and technology borrowers. Since around 2020, enterprise software has been one of the most favored sectors for private lenders, prized for its recurring revenues, high margins, and perceived resilience to economic cycles. PitchBook noted that many of the largest unitranche loans on record — a structure combining multiple debt tranches into a single, often highly leveraged instrument — have been extended to software and tech companies.

According to PitchBook data, software accounts for roughly 17% of U.S. business development companies’ investments by deal count, second only to commercial services. That concentration leaves private credit particularly vulnerable if AI adoption accelerates faster than software firms can adapt their products, pricing, and cost structures.

“Private credit loans to a lot of software companies,” said Jeffrey C. Hooke, a senior lecturer in finance at Johns Hopkins Carey Business School. “If they start going south, there’s going to be problems in the portfolio.”

Analysts warn that AI-driven disruption could unfold differently from past technology shifts. Rather than simply creating new demand, advanced AI tools may directly substitute for software products, eroding revenues without a clear transition period. That raises the risk of sudden cash-flow deterioration, especially for mid-sized, sponsor-backed software firms that rely on steady subscription income to service debt.

UBS Group has modelled an aggressive disruption scenario in which default rates in U.S. private credit climb to 13%. That compares with stressed default estimates of about 8% for leveraged loans and 4% for high-yield bonds, highlighting how exposed private credit could be in a severe downturn tied to technological change rather than a traditional recession.

The risk is compounded by structural features of the private credit market itself. Unlike public debt, private loans are illiquid and infrequently marked to market, making it difficult for investors to assess stress in real time. Loan extensions, amendments, and payment deferrals can mask underlying weakness, sometimes for years.

Hooke said many of these issues existed well before the latest AI concerns. He pointed to persistent problems around liquidity, refinancing risk, and valuation opacity, arguing that AI has merely added pressure to a market already showing signs of strain.

Those warnings echo broader concerns raised by senior figures in global finance. JPMorgan Chase CEO Jamie Dimon cautioned last year that problems in private credit often resemble “cockroaches,” where the appearance of one issue suggests others may be lurking unseen. The fear among investors now is that AI could be the catalyst that exposes hidden fragilities across portfolios.

Kenny Tang, head of U.S. credit research at PitchBook LCD, said AI disruption will not affect all software borrowers equally. Some firms are likely to integrate AI into their offerings and strengthen their competitive position, while others — particularly those selling narrowly defined or easily replicable services — may struggle.

“AI disruption could be a credit risk for private credit lenders for some of its Software & Services sector borrowers and perhaps not for others,” Tang said, adding that outcomes will depend on how quickly companies adapt.

One area drawing particular scrutiny is the prevalence of payment-in-kind loans in the software sector. These arrangements allow borrowers to defer interest payments by capitalizing them into the loan principal. While PIK structures are often justified by growth expectations, they can become dangerous if revenues falter. Software and services companies represent the largest share of PIK loans, according to PitchBook, increasing the risk that deferred interest snowballs into unsustainable debt burdens if AI competition intensifies.

Moody’s Analytics chief economist Mark Zandi described the combination of rapid private credit growth, rising leverage, and limited transparency as clear warning signs. While he said the industry may be able to absorb losses in the near term, he warned that capacity could be tested if credit expansion continues at its current pace.

“There will surely be significant credit problems,” Zandi said, noting that today’s resilience may not hold if stresses accumulate over time.

Some private credit managers have moved to reassure investors. Ares Management CEO Michael Arougheti said the firm’s exposure to software is relatively modest, with software loans making up about 6% of total assets and less than 9% of private credit assets under management. He said Ares focuses on profitable software businesses with strong cash flow and conservative leverage, helping keep problem loans near zero.

Still, the broader sell-off suggests investors are reassessing assumptions that underpinned years of private credit expansion. As AI tools grow more capable and more widely deployed, they are forcing lenders and investors to confront a difficult question: Will the sector’s reliance on software borrowers remain a strength, or is it becoming a concentrated risk?

In a market built on long-dated, opaque loans, the speed of AI-driven change may prove to be its most unsettling feature.