By Linh Tran, Market Analyst at XS.com
Crude oil prices are on track to erase most of the previous session’s gains after falling nearly 3.5% during the Asian session, indicating that the market is beginning to reassess expectations following a strong rally driven by geopolitical tensions.
This move comes amid reports suggesting that the United States and Iran have made some progress through backchannel diplomatic efforts, even as their official stances remain firm. As a result, the market is temporarily reassessing the likelihood of immediate escalation, reducing part of the risk premium that had been priced in earlier.
Previously, oil’s rally was largely driven by concerns over potential supply disruptions, particularly around the Strait of Hormuz, a key transit route accounting for roughly 20% of global oil supply. However, so far, the actual impact on global oil flows remains relatively limited, with disruptions largely localized rather than systemic.
The emergence of dialogue signals, albeit informal, has triggered profit-taking following the recent rally, while also pushing the market into a corrective phase as worst-case scenarios have yet to materialize.
In the near term, oil prices are likely to remain driven by headlines. In the absence of new escalation signals, downward pressure may persist. That said, geopolitical risks remain firmly in place. Any developments involving disruptions to shipping routes or attacks on energy infrastructure could quickly reverse the current trend.
The recent decline in oil prices reflects a recalibration of market expectations rather than a shift in underlying fundamentals. In the current environment, oil is likely to remain highly sensitive to news flow, with elevated two-way volatility continuing to dominate price action.
