Oil prices fell more than $2 a barrel on Wednesday as renewed talks between Iran and Oman raised expectations that shipping restrictions through the Strait of Hormuz could ease and potentially reduce concerns over global crude supplies.
Brent crude oil, against which Nigerian crude oil is priced, dropped $2.30 or 2.6% to $86.28 a barrel during early trading, after touching their lowest level since August 13.
U.S. West Texas Intermediate crude fell $2.08 or 2.5% to $80.29 a barrel, reaching its lowest level since August 10.
The declines extended Tuesday’s selloff, when both crude benchmarks dropped more than 3% as traders reduced some of the geopolitical risk premium built into oil prices.
Market sentiment improved after Iran resumed discussions with Oman over arrangements for managing commercial navigation through the Strait of Hormuz, a critical route for global energy supplies.
The negotiations include discussions around establishing a temporary navigational corridor and clearing mines from the waterway, measures that could allow more commercial vessels to pass through safely if an agreement is reached.
Before the conflict involving Iran, the Strait of Hormuz handled roughly one-fifth of global oil and liquefied natural gas shipments, making disruptions in the waterway a major source of volatility in international energy markets.
However, shipping activity remains substantially below normal levels despite the latest diplomatic developments.
Only five commodity vessels passed through the strait on Tuesday, compared with a 10-day average of about 15 vessels, indicating that physical supply constraints have not disappeared.
The market is therefore pricing in expectations of improved shipping conditions rather than a complete return to normal traffic.
Oil prices had remained elevated in recent weeks as investors assessed the impact of the conflict, restrictions on shipping and efforts by the United States to increase economic pressure on Tehran.
Washington recently announced additional sanctions targeting Iran’s economy and entities linked to the country. Traders, however, have so far focused more heavily on signs of diplomatic progress that could improve oil movements through Hormuz.
Further pressure on crude prices came from indications of rising U.S. inventories.
Industry data showed U.S. crude inventories increased by about 4.2 million barrels last week, considerably higher than the roughly 600,000-barrel increase expected by analysts.
Investors are awaiting official inventory figures from the U.S. Energy Information Administration for confirmation of the increase. A sustained build in inventories could reinforce concerns that supply is exceeding near-term demand.
Despite Wednesday’s sharp decline, uncertainty surrounding the Strait of Hormuz remains a major factor for the oil market.
Any concrete agreement that significantly restores tanker traffic could remove more of the geopolitical premium embedded in crude prices. Conversely, a breakdown in negotiations or renewed disruption to shipping could quickly revive supply concerns and push prices higher.
For now, traders are closely watching the Iran-Oman negotiations, vessel movements through Hormuz and U.S. inventory levels for the next direction in crude prices.
