Will Donald Trump’s new sanctions against Iran work?

Oil prices experienced a decline of over US$1 per barrel on Monday as investors liquidated positions ahead of the anticipated US announcement of a new round of sanctions on Iran. Brent crude futures dropped by US$1.49, or 1.6%, to US$92.90 by 0649 GMT, while West Texas Intermediate crude reduced by US$1.74, or 2%, to US$85.32 a barrel.

Both contracts had witnessed their second weekly increase last week, rising more than 5% as talks between the US and Iran remained inconclusive, effectively blocking oil shipments through the Strait of Hormuz, which typically carried a fifth of the world's oil supply.

US Treasury Secretary Scott Bessent is poised to deliver a press conference at 2 pm EDT (1800 GMT) on Monday, where he has hinted at imposing "the toughest sanctions in history" on Iran. President Donald Trump has also threatened to impose sanctions on Iran's trading partners. Analysts from Saxo Bank commented that the oil price slide occurred after a two-week rally, with traders awaiting the US strategy to economically isolate Iran, which would be announced later on the same day.

Iran has denounced the planned US sanctions and called for a diplomatic resolution to the ongoing conflict. While some hardliners within Iran's leadership might prefer to continue fighting, the more pragmatic elements would likely favor de-escalation, according to IG markets analyst Tony Sycamore. The analyst further predicted that by the end of the week, the situation in Iran would provide a clearer picture of which faction holds more influence.

Iranian crude offers to Chinese buyers have dwindled, and prices have soared as the US blockade has curtailed shipments of crude from Teheran. Trade sources reported a decline in offers of Iranian crude to Chinese buyers, coupled with a surge in prices due to restricted shipments. However, Iran has granted permission to a few Iraqi oil tankers to sail through the Strait of Hormuz following repeated requests from Baghdad, as per Iran's state news agency IRNA's report on Saturday.

Analysts anticipate that the recovery in Middle Eastern supplies may take longer than initially anticipated due to the ongoing US-Iran conflict. Crude supply is tightening as recent weeks have witnessed a significant decline in oil-on-water, alongside a decrease in onshore inventories, including in China. Morgan Stanley analysts emphasized that a reduction in supply, chiefly originating from the Middle East, is driving the current oil price surge, as several data sources indicate aggregate exports from the region have rebounded to March/April levels.