Oil declines as US and Iran explore agreement to reopen Hormuz

Oil declined as US and Iranian negotiators explored a phased deal that would see Tehran reopen the Strait of Hormuz.

Global benchmark Brent dropped below $106 a barrel after rising more than 7% over the previous two days, while West Texas Intermediate was near $93. The two countries — which have failed to make similar agreements in recent months — were pushing for a breakthrough on the sidelines of the United Nations General Assembly, according to a person familiar with the discussions.

Iranian Foreign Minister Abbas Araghchi told journalists in New York that Tehran had submitted a new seven-day proposal to Washington to reopen Hormuz if certain conditions were met, the Financial Times reported.

A pump jack near Imperial, Texas, where oil production is rampant. Photographer: Mark Felix/Bloomberg

Crude has had another volatile week, as the conflict between Washington and Tehran approaches the end of its seventh month. Prices have been buffeted by mixed signals on the outlook for the war, indications of a pick-up in Middle East flows, and speculation that the US may ban diesel exports. For the year, Brent remains more than 70% higher, stoking inflationary pressures.

“Brent probably stays around $100 to $110 unless something materially changes,” said Haris Khurshid, chief investment officer at Karobaar Capital LP. “A credible, phased deal could push it back below $100 fairly quickly, while another failure in the export or logistics chain could put $120 back in play.”

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While front-month futures were weaker on Friday, prices remain on course for a weekly gain, as some widely tracked metrics pointed to elevated concerns about near-terms supplies. Among them, Brent’s prompt spread — the difference between its two nearest contracts — was $6.80 a barrel in backwardation. That’s a bullish pattern, with the gap near the widest since April.

There were other signs of tightness. On Thursday, traders paid record premiums to secure prompt barrels at the main US crude-storage hub in Cushing, Oklahoma. In Europe, Dated Brent —  a critical physical indicator — has been trading at a wide premium to futures. Some European refiners were told earlier this month they will be allocated no crude in October under long-term agreements after a Saudi export pipeline was shut.

Hormuz — the narrow waterway that links the Persian Gulf to global markets — has been at the centre of the war. The Islamic Republic has insisted that it has sovereign control over the conduit, which in peacetime used to carry about a fifth of daily global oil and natural gas supplies. The US has said the status of the route must not be changed, while imposing a blockade of Iran’s ports.

Attacks on commercial shipping in Hormuz — a long-standing feature of the conflict that’s squeezed supplies, boosted freight rates, and roiled insurance markets — has remained a feature this week. In recent incidents, a cargo vessel was on fire and adrift after being struck by an unknown projectile on Sept. 23, UK Maritime Trade Operations said.

A White House official said that President Donald Trump remained open to talking with Iran but stressed the US didn’t need to negotiate because it was in a strong position as a result of its sanctions campaign and the blockade. The US leader started the war in late February, launching a joint attack alongside Israel with the stated aim of ending Tehran’s nuclear program.

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“We saw for six months a lot of zigzag in response to a comment or a kind of headline coming out of either the United States or coming out of Iran,” said Carolyn Kissane, associate dean at the Center for Global Affairs at New York University. “Now, the market sort of wants to see actual real action.”

Prices:

Brent for November settlement dropped 0.8% to $105.78 a barrel at 1:22 p.m. in Singapore.
WTI for November traded 1.5% lower at $93.18 a barrel.

There has been fresh fighting in the Middle East, with more nations committing troops. Saudi Arabia intercepted missiles fired toward the Red Sea port of Yanbu and the city of Taif on Thursday, as Iran-backed Houthi militants launched more strikes. The kingdom’s critical East-West pipeline — which feeds the Yanbu terminal — remains offline following attacks earlier this month.

French President Emmanuel Macron said his country would deploy troops to help secure a Saudi energy plant. That follows the UK agreeing to help Riyadh in countering the Houthi threat with defensive air-to-air refueling support.

In product markets, President Trump’s economic advisers are analyzing the ramifications of a potential short-term ban on American diesel exports, according to Senator John Hoeven, a Republican from North Dakota.

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