Oil Prices Rebound Sharply After Brutal Midweek Rout

Oil prices experienced a sharp rebound on Thursday, recovering from a severe drop on Wednesday as traders contemplated whether the outcomes of the U.S. midterm elections would result in the swift conclusion of the Iran war. Brent crude climbed to $98.01 per barrel by early afternoon, rising $3.39, or 3.58%, while West Texas Intermediate increased $2.21, or 2.51%, to $90.33. Both markers continued to rise throughout the day.

The rally came after a dramatic sell-off on Wednesday, when Brent plummeted $8.98, or 8.7%, to $94.62, and WTI fell $7.97, or 8.3%, to $88.12. Both benchmarks had their lowest settlements since August 31. The catalyst for the price surge was the Democratic party's victory in both chambers of Congress during the midterm elections, which raised expectations that President Donald Trump would face more pressure to end the eight-month conflict with Iran.

This speculation led to a significant decline in Brent prices, with the benchmark dropping roughly 18% this week as traders sold off their positions en masse due to the growing likelihood of a diplomatic settlement. However, by Thursday, the chances of a rapid resolution seemed to diminish.

Eurasia Group revised its estimated probability of a negotiated agreement downward to just 10%, from the previous 20%, while increasing the possibility of renewed U.S. strikes to 60%. In addition, shipping risks have not vanished. Reuters reported at least five vessel incidents in the Persian Gulf since Sunday, with ongoing threats to commercial traffic despite the recovery in crude shipments through the Strait of Hormuz.

Iran is currently reviewing proposals presented by regional mediators, but Washington and Tehran remain at odds regarding the terms of an agreement. The sharp decline on Wednesday was exacerbated by heavy liquidation in crude futures, according to market participants cited by Bloomberg. With prices approaching technically oversold territory, Thursday's recovery may be the result of traders rescinding some of their sold positions.

The physical oil market has experienced significant changes as Gulf crude exports have returned to pre-war levels, albeit at higher transportation costs. However, the geopolitical risk associated with these shipments remains unresolved.