Oil falls below $100 on Hormuz reopening hopes and Saudi pipeline restarting

Oil prices dipped below $100 per barrel as optimism grew that Iran might soon reopen the Strait of Hormuz and that Saudi Arabia's East-West pipeline would resume operations, signaling a possible easing of supply constraints. The benchmark Brent crude fell 2.64% to $97.69 a barrel, while US crude West Texas Intermediate dropped 3.20% to $89.41 a barrel.

Gasoline and heating oil futures also experienced declines of 2.1% and 3.1%, respectively. The S&P GSCI commodity index suffered a 1.5% drop. Iran has expressed readiness to reopen the Strait of Hormuz within a week if the US eases military pressure and lifts its blockade of Iranian ports. Tehran has also conveyed a proposal to Washington through intermediaries, generating hopes for a diplomatic breakthrough following nearly seven months of disruptions to a crucial energy transit route.

Saudi Aramco restarted its East-West pipeline on Tuesday at a reduced rate, with Red Sea port of Yanbu expected to resume crude exports later in the day. The pipeline serves as Saudi Arabia's primary alternative to Hormuz, transporting crude from the Red Sea port of Yanbu. The pipeline's shutdown on September 13 following drone attacks on pumping infrastructure led to reduced crude loadings from the Red Sea port and cancellation of some shipments to European customers.

Saudi crude shipments through Hormuz have surged, averaging 2.9 million barrels per day over six days to September 18, up from around 700,000 bpd in August, based on JP Morgan analysts' satellite data. The increase in Saudi shipments has pushed Brent below $100 for the first time since September 9. Saudi Arabia is utilizing a combination of direct voyages through the Strait of Hormuz and ship-to-ship operations off the coast of Oman, primarily at Sohar in the Gulf of Oman, to transport crude.

Analysts predict that Saudi Arabia will continue to boost eastern or Hormuz exports as long as alternative lines remain constrained, contingent on the timely restoration of partial pipeline capacity and the security situation around Hormuz. However, overall traffic through Hormuz remains significantly limited, with only two commercial vessels visible on Monday compared to about 125 daily before the conflict began on February 28.

The figures exclude vessels with Automatic Identification System transponders turned off. Two tankers were also attacked in the strait, highlighting the ongoing risks despite increasing hopes of a diplomatic resolution. A decline in crude prices would provide relief to policymakers grappling with an energy-driven inflationary shock.

The Federal Reserve recently raised interest rates for the first time since 2023, setting the benchmark rate at 3.75-4.00%, joining the European Central Bank and Bank of Japan in tightening monetary policy. Rising diesel prices in the US to $6.50 a gallon, its highest level this year, underscore the impact of the energy crisis. Traders are also monitoring the upcoming meeting between US President Donald Trump and Chinese President Xi Jinping in Washington, looking for any indications on secondary sanctions against Iranian crude buyers and China's willingness to serve as a swing consumer in the market.