By COMFORT OGBONNA
Oil prices fell by more than $1 a barrel on Thursday, extending a run of declines as investors grew more hopeful that diplomatic efforts involving Iran could eventually reopen the Strait of Hormuz and ease disruptions to global energy supplies.
Brent crude futures fell $1.07, or 1.2%, to $86.77 a barrel by 0645 GMT, putting the international benchmark on track for a fourth consecutive session of losses.
U.S. West Texas Intermediate crude futures dropped $1.13, or 1.4%, to $81.10 a barrel and were headed for a fifth straight day of declines.
The latest selling came as markets assessed efforts to resolve the conflict in the Middle East and restore shipping through the Strait of Hormuz, one of the world’s most important energy routes.
Iran and Oman have been working on the details of an arrangement concerning control of the strategic waterway, according to an Iranian official familiar with the discussions. The developments have raised hopes among traders that at least some restrictions on shipping could eventually be eased.
The Strait of Hormuz connects major oil-producing countries in the Persian Gulf with international markets. Before the war began on Feb. 28, shipments of oil and liquefied natural gas through the waterway represented roughly one-fifth of global consumption of those fuels.
Since Iran moved to restrict traffic through the strait, energy flows have fallen sharply. Ship-tracking data indicates that oil shipments have dropped to roughly one-quarter of their pre-war levels, creating significant concerns about the availability of crude and other petroleum products.
The possibility of the waterway reopening has therefore become a major factor in oil-price movements.
“Crude oil edged lower as the prospect of the Strait of Hormuz reopening improved amid ongoing talks,” said Daniel Hynes, senior commodity strategist at ANZ. He cautioned, however, that concerns about shortages in the oil market remain.
Diplomatic efforts are expected to receive another boost on Thursday, when Qatar’s prime minister is scheduled to travel to Iran in an attempt to restart negotiations aimed at ending the conflict, which has now lasted nearly six months.
The United States has also paused attacks on Iran for about a month while pursuing additional economic pressure against Tehran. The combination of a temporary reduction in military activity and renewed diplomatic efforts has encouraged some investors to expect energy disruptions in the Gulf to ease.
Still, significant differences remain between the parties over the conditions required to end the fighting.
Iran has continued to assert its influence over shipping in the Gulf and the Strait of Hormuz, while Iranian officials have indicated that the waterway may remain restricted unless Washington agrees to conditions tied to an interim ceasefire reached in June that later collapsed.
The uncertainty means that oil traders remain reluctant to assume that a full reopening of the strait is imminent.
At the center of the broader dispute is Iran’s nuclear program, a complicated issue that could take considerable time to resolve. Iran also understands the strategic importance of the Strait of Hormuz and the leverage its control provides, increasing the possibility that uncertainty over shipping could continue.
“As long as the risk to supply remains, some degree of war premium can continue to be priced into oil,” said Priyanka Sachdeva, head of market insights at Phillip Nova.
The so-called war premium has helped keep crude prices elevated despite recent declines. Investors have been weighing the possibility of a diplomatic breakthrough against the risk that renewed fighting or continued restrictions could further disrupt supplies.
The oil market is also facing pressure from problems in the global diesel market.
The conflict in the Middle East has damaged some refineries in the region, while attacks linked to the Russia-Ukraine war have disrupted several Russian refineries. Russia has historically been a major supplier of diesel to international markets, meaning reduced refinery output could tighten supplies even if crude production remains available.
The impact is already becoming visible in inventory data.
U.S. distillate inventories, which include diesel and heating oil, fell by 2.2 million barrels in the week ended Aug. 21 to 103.4 million barrels, according to government data released Wednesday.
That decline has added to concerns about refined fuel supplies heading into a period when demand can increase.
The level of distillate inventories is particularly significant because diesel is widely used in transportation, agriculture, construction and industry. A prolonged reduction in refinery output could therefore place additional pressure on fuel prices and operating costs across the global economy.
Hynes said the latest inventory level was the lowest recorded for this time of year, highlighting the growing pressure on the diesel market.
The divergence between crude oil and refined-product markets presents a complicated outlook for energy investors. Crude prices are being pushed lower by hopes of a reopening of the Strait of Hormuz, while diesel markets remain vulnerable to refinery disruptions and declining inventories.
For now, traders are likely to remain focused on diplomatic developments involving Iran, Oman and Qatar, as well as any changes in shipping through the Strait of Hormuz.
A sustained reopening of the waterway could remove a major source of supply risk and put further downward pressure on crude prices. But any renewed military escalation or failure of negotiations could quickly reverse that trend and restore the risk premium that has supported oil prices during the conflict.
Until there is greater certainty, the market is likely to remain highly sensitive to developments in the Middle East, with traders balancing hopes of improved energy flows against the continuing threat of disruptions to one of the world’s most important oil shipping routes.
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