Oil prices retreat as traders await fresh US sanctions on Iran

On Monday, oil prices dropped more than $1 a barrel as traders took profits from last week's gains, anticipating a potential announcement of more stringent US sanctions on Iran, according to a Reuters report. Brent crude fell 1.3% to $93.16 a barrel, while West Texas Intermediate declined 1.6% to $85.70. Both benchmarks had risen over 5% during the previous week as US-Iranian diplomatic efforts broke down, increasing the risk of prolonged disruptions to oil flows through the Strait of Hormuz, which typically handles about a fifth of global oil supplies.

US Treasury Secretary Scott Bessent was scheduled to provide details on the administration's next steps at a press conference on Monday, after warning that Washington was preparing its toughest sanctions yet against Iran. President Donald Trump had also threatened measures targeting countries and entities trading with Tehran. The possibility of tighter sanctions posed a challenge for oil markets, as they could further cut Iranian exports, but could also heighten the risk of retaliation and additional disruptions across the region.

Iran had refused the planned sanctions, but President Masoud Pezeshkian had still called for a diplomatic resolution. The disagreement between more moderate elements of the Iranian leadership and hardliners might become increasingly significant for markets as the conflict progressed. Analyst Tony Sycamore from IG Markets noted that the balance of power within Tehran could be clearer by the end of the week, with pragmatic figures favoring de-escalation and hardliners possibly pushing for further confrontation.

Meanwhile, the effects of restrictions on Iranian exports were already evident. Offers of Iranian crude to Chinese buyers were decreasing, while prices rose as US measures restricted shipments, according to trading sources. Iran had permitted a few Iraqi oil tankers to pass through the Strait of Hormuz despite requests from Baghdad, as reported by Iranian state media.

Supply worries were also spreading beyond Iranian exports. Morgan Stanley analysts pointed out that oil stored on tankers had decreased sharply in recent weeks, and onshore inventories, including in China, were also falling.

The bank said Middle Eastern exports had rebounded to levels seen in March and April, prompting the analysts to postpone expectations for a recovery in regional supply. For hedge funds and other energy investors, the mix of tightening physical markets, geopolitical risk, and potentially more aggressive US sanctions left crude prices vulnerable to further fluctuations as markets evaluated whether the latest escalation resulted in a permanent loss of supply or instead pushed Washington and Tehran back towards negotiations.