Oil Slides Five Per Cent as US-Iran Strikes Pause Temporarily

Oil prices fell more than 5% in early Asian trading on Monday after Iran said it would suspend its attacks for as long as the United States maintained a pause in its bombing campaign. The reciprocal halt raised hopes of renewed diplomacy and a gradual recovery in shipping through the Strait of Hormuz.

Market Reaction

Brent crude futures fell $4.89, or 5.05%, to $91.89 a barrel by 0009 GMT after briefly dropping below $90. US West Texas Intermediate crude (WTI) declined $4.67, or 5.23%, to $84.64 a barrel. Both benchmarks traded at their lowest levels in nearly a week.

The retreat reflected the removal of part of the geopolitical risk premium that had lifted Brent to $100 during the previous week. Prices had risen as attacks threatened oil shipments through both the Strait of Hormuz and the Bab el-Mandeb passage in the Red Sea.

“Hopes are rising that a genuine diplomatic path may be opening,” IG markets analyst Tony Sycamore said in Monday commentary. He said a return to the earlier 14-point memorandum, with clearer arrangements governing Hormuz, could provide a starting point for negotiations.

Reciprocal Pause

A senior Iranian official said Tehran would halt its operations if Washington continued to hold fire. The message had been communicated to the United States, although the official described Iran’s position as remaining based on an “attack for attack” principle.

No US attacks were reported on Saturday or Sunday after 13 consecutive nights of air strikes. Iran, which had responded with attacks on neighbouring countries hosting US military bases, also refrained from launching new strikes during the weekend.

US Ambassador to the United Nations Mike Waltz said President Donald Trump had paused the campaign to give diplomatic efforts more time. He said military options remained available if negotiations failed.

Washington Weighs Its Options

The US pause followed discussions among Trump’s military and political advisers about the effectiveness of further strikes and the pressure the campaign was placing on American weapons inventories. US officials said previously selected targets had largely been exhausted, while extended operations could further reduce stocks of air-defence interceptors.

General Dan Caine, chairman of the Joint Chiefs of Staff, privately warned that renewed major operations would carry additional risks, according to a US official cited by Reuters. US Central Command and Caine’s office declined to comment on private military advice.

Iran remained cautious about the pause. The Iranian source said officials in Tehran were more sceptical than optimistic and viewed the halt as potentially tactical rather than evidence of a lasting change in US policy.

Shipping Risks Persist

The lull did not immediately restore normal traffic through Hormuz. Fewer than 10 commodity vessels passed through the strait each day over the weekend, according to shipping data from Kpler. Before the conflict, about one-fifth of global oil flows passed through the waterway.

Traffic through Bab el-Mandeb also declined after Yemen’s Iran-aligned Houthi movement attacked Saudi oil installations along the Red Sea coast. The continuing threat to both routes means physical supply conditions remain tighter than the sharp fall in futures prices may suggest.

“Any rebound in flows through the Strait of Hormuz is likely to prove slow and partial,” MST Marquee analyst Saul Kavonic said. He added that shipping companies would require greater confidence in vessel safety before returning more tankers to the Gulf.

Broader Implications

A durable pause could ease pressure on fuel, freight and insurance costs, reducing the risk that the conflict produces another global inflation shock. Lower oil prices could also give central banks more flexibility as they assess whether interest rates need to remain elevated.

However, the two sides have not announced a formal ceasefire or a timetable for negotiations. The earlier interim agreement collapsed after renewed military action, leaving traders cautious about treating the latest pause as permanent.

Outlook

Markets will watch whether the US and Iran continue to refrain from attacks, whether mediators can revive formal negotiations and how quickly tanker traffic returns to Hormuz.

Further Houthi attacks in the Red Sea will also remain important. A renewed exchange of strikes or continued disruption to either shipping route could quickly restore the risk premium in oil prices.

About the author

 

Martin Lam is ATFX Chief Analyst for Asia Pacific, with over 20 years of experience in global forex and investment markets. He holds a degree in Finance and Economics from Deakin University and has held senior roles at leading FX brokerage firms.

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