Oil rises as doubts over US-Iran deal heighten supply concerns

Oil prices climbed to a one-week high on Tuesday amid uncertainty surrounding a potential U.S.-Iran peace deal, as market participants feared ongoing supply disruptions in the Middle East. Brent crude futures increased $1.19, or 1.4%, to $88.91 a barrel, while U.S. West Texas Intermediate (WTI) crude rose $1.07, or 1.3%, to $83.20.

This represented the highest closes for both crude benchmarks since July 31, marking a second consecutive day of gains after both contracts surged about 5% on Monday as hopes for a U.S.-Iran peace deal waned.

The Strait of Hormuz, a critical chokepoint for global oil supply, would likely remain closed unless the U.S. altered its approach and recognized Iran's demands to cease hostilities, according to Mohsen Rezaei, the newly appointed secretary of Iran's Supreme National Security Council. Around 20% of global oil supply passes through the strait prior to the onset of the Iran war on February 28.

Rezaei's remarks suggest that any forthcoming peace agreement between Iran and Oman may not alleviate the strait's closure, as the U.S. would also need to adhere to the terms of a memorandum of understanding aimed at ending the conflict. Shipping data revealed that traffic through the Strait of Hormuz dwindled to six vessels on Monday, compared to an average of approximately 11 vessels over the past 10 days. Pre-war, the daily traffic through the waterway typically ranged between 125 and 140 vessels.

Additional conflicts in the Middle East further exacerbated the supply concerns. Yemen's Iran-aligned Houthi rebels targeted a Saudi vessel carrying military equipment in Bab el-Mandeb, situated between the Red Sea and the Indian Ocean. Meanwhile, a missile strike on a container ship off the coast of Pakistan was suspected to be a U.S.-initiated action.

The U.S. Energy Information Administration (EIA) reported on Tuesday that Middle Eastern producers might find it challenging to restore oil output to pre-conflict levels by the end of 2027, even if trade patterns normalize by early 2028. Despite a return to normal trade patterns by early next year, the EIA predicts that some producers in the region may struggle to meet pre-conflict production levels.

Libya's oil industry faced additional disruptions due to renewed violence in the strategic city of Zawiya. State oil firm the National Oil Corporation indicated that they might declare force majeure if drone attacks on energy assets in the city persist. Libya is an OPEC member. Meanwhile, the Abu Dhabi National Oil Company announced that they would offer spot crude in a tender for the eighth time since the start of June as the UAE state oil company endeavors to move oil through the Strait of Hormuz.

Geopolitical tension continues to impact global energy prices, with the Ukrainian military attacking an oil refinery in Russia's Orenburg region. This escalation, alongside the Iran war, has limited global supplies and contributed to the upward trend in global energy prices, with Brent futures up about 44% so far this year. Russia, as the world's third-largest crude oil producer, is a member of the OPEC+ group of countries alongside OPEC and its allies.