Oil prices fall 3% as US shifts to Iran sanctions; brent, WTI drop amid Hormuz risks

Oil prices experienced a 3% decline on Tuesday as the United States transitioned its strategy from military strikes to economic sanctions aimed at pressuring Iran. Brent crude, the global oil benchmark, dropped 3.3% to $89.14 per barrel, while US West Texas Intermediate crude, or WTI, fell 3.1% to $82.36 per barrel. This downward trend marked a 5% or more decrease in oil prices for the week following the US announcement of new sanctions against Iran and entities trading with the country.

The White House characterized its campaign against Iran as an "economic D-Day," with Treasury Secretary Scott Bessent referring to it as the "single greatest financial offensive ever." Treasury Secretary Bessent stated that the intensified economic pressure on Iran makes the likelihood of a major war unlikely for now. "If we are doing the maximum economic pressure, then that means that likely there will not be a large-scale kinetic restart," Bessent told CNBC's "Squawk on the Street" on Thursday.

The US is also displaying signs that it does not anticipate an immediate return to full-scale military conflict. The State Department is preparing to send back evacuated US diplomats to the Middle East as early as this week, as reported by The New York Times. This move could indicate that Washington does not foresee all-out warfare resuming.

President Donald Trump announced on Tuesday that the US Navy had cleared all mines from international waters in the Strait of Hormuz. He warned Iran against placing new mines in the crucial waterway, stating that any ship or boat placing new mines would be destroyed immediately. The US is closely monitoring the Strait of Hormuz through the Space Force, noting that they are observing "every square inch" of the Strait.

Despite the shift towards economic pressure, the US has not completely ruled out the possibility of military action against Iran. Defense Secretary Pete Hegseth stated that further strikes in the Middle East remained a possibility if necessary. "If we need to use kinetic strikes, we'll use them," Hegseth told reporters. Hegseth warned that the US would respond if Iran were to act against American military forces.

Iran, for its part, has declared readiness to confront additional US sanctions. Iranian Economy Minister Ali Madanizadeh stated on state television that Tehran is "fully prepared" to endure more sanctions. He noted that Iran has already developed a two-year plan to manage the situation, stating that the Iranian government possesses its own tools and knows how to respond to US pressure.

The latest sanctions could also impact China, one of Iran's largest trading partners. If China continues purchasing Iranian oil under the new US sanctions framework, it could face repercussions. China has consistently advocated for a diplomatic resolution to the US-Iran conflict and opposes unilateral sanctions lacking international law approval or UN Security Council endorsement.

China's Foreign Ministry spokesperson, Lin Jian, emphasized that China opposes sanctions lacking lawful justification and stated that China's trade and cooperation with Iran adhere to international law and should not be disrupted. Analysts at BBH suggested that the latest US sanctions appear more like a warning rather than a decisive final action against Iran.

The US expanded sanctions but refrained from immediately imposing secondary sanctions on other nations that continue trading with Iran. China, being Iran's leading trading partner and purchasing approximately 90% of Iran's oil exports, represents a significant challenge for the US if Washington intends to intensify the impact of its sanctions.

BBH cautioned that directly targeting China over its Iranian oil trade could result in financial disruption, provoke China's retaliation, and strain the already fragile US-China relationship. For oil markets, the primary concern remains the ongoing use of economic sanctions versus the expansion of military action and its implications for Iran's oil exports and the Strait of Hormuz.