Oil rebounds as Middle East supply risks offset diplomatic hopes

Oil prices rebounded on Tuesday after four days of declines, as traders weighed the potential for a diplomatic resolution to the US-Iran conflict alongside ongoing threats to crude supplies in the Middle East, according to Bloomberg. Brent crude prices edged closer to $102 a barrel, having dropped nearly 8% over the prior four sessions.

Investors were evaluating the possibilities of negotiations between US President Donald Trump and Iranian President Masoud Pezeshkian, as well as Trump's upcoming meeting with Chinese President Xi Jinping later in the week. These diplomatic efforts have bolstered hopes that some of the supply disruptions stemming from the conflict might eventually subside.

However, the likelihood of a breakthrough remains unclear, with Washington and Tehran holding vastly different positions. Meanwhile, physical supply risks remain high. A tanker was reportedly hit in the Strait of Hormuz on Monday, according to UK Maritime Trade Operations. Satellite imagery also suggested that Saudi Arabia is reallocating more oil exports back to the Strait of Hormuz following the closure of a major pipeline.

Libya has added to supply disruptions, with production at the nation's biggest oil field, Sharara, plummeting more than half after an armed group blocked a pipeline feeding the Zawiya export terminal. Output at the field is now estimated at around 127,000 barrels per day. Oil prices have surged nearly 70% this year due to the Middle East conflict disrupting shipments through the Strait of Hormuz, while the Russia-Ukraine war has also damaged energy infrastructure.

Refined products have seen an even steeper rise, with US retail diesel prices exceeding $6.50 a gallon for the first time. The ongoing conflict, which escalated in February following US and Israeli strikes on Iran, has further escalated across the region. The UK has pledged support for Saudi Arabia in defending against attacks by Iran-backed Houthi rebels, who have also threatened commercial shipping in the Red Sea and Bab el-Mandeb strait.

European Union foreign policy chief Kaja Kallas has called on member states to furnish extra naval and air assets to safeguard shipping in the Red Sea. Operation Aspides, the EU's ongoing presence in the region since 2024, may expand in response to the heightened maritime traffic threat. The Trump administration has suggested a $5bn reconstruction fund for conflict-damaged infrastructure, the Partnership for Allied Construction & Trust, to be managed by the US Development Finance Corporation.

This initiative aims to spur investment and rebuild across the region. For macro and commodity-focused hedge funds, the interplay between supply disruptions and diplomatic progress is fueling a market predominantly driven by geopolitical events. Oil's sharp price increase this year has also become a crucial factor for investors evaluating the conflict's inflationary effects and potential impact on monetary policy.

This surge has already boosted inflation, leading the Federal Reserve to raise interest rates last week.