Peace Hopes Pull Oil Lower, but Hormuz Risk Keeps a Floor Under Prices

The logic driving oil prices is shifting quickly from a war premium to peace expectations. After the U.S. midterm elections, President Trump said another strike on Iran was highly unlikely as long as negotiations kept making progress, and markets began pricing in an end to the conflict. Brent crude has fallen roughly a fifth since early November and touched a more than two-month low this week. In Asian trading on Thursday, Brent slipped below $92 a barrel on hopes of progress in both the Iran talks and the Russia and Ukraine negotiations. The significance of this decline goes beyond a price correction. The force setting the price of oil has moved away from physical supply disruption and toward every signal coming out of the negotiating room.

The softening reflects easing on both the diplomatic and supply fronts. On the diplomatic side, Russia and Ukraine held U.S.-mediated talks in Abu Dhabi and agreed to a large-scale prisoner swap, even though major issues such as territory remain unresolved. With a U.S. and China summit set for next week, markets also see little chance of escalation in the Middle East before then. On the supply side, a sharp increase in Saudi output lifted OPEC+ production in October, while industry data showed U.S. crude inventories jumping by 9 million barrels in a single week, limiting room for a rebound. Still, the market is far from convinced that the war premium is gone for good. Iran's top security official said no enriched nuclear material would be allowed to leave the country, a stance squarely at odds with Washington's insistence that the nuclear issue be on the table, and oil bounced more than 1% on Wednesday. More importantly, 37 ships were attacked in the Strait of Hormuz in October, the most in any month since the war began, and Hiroyuki Kikukawa, chief strategist at Nissan Securities Investment, argues that this uncertainty makes a dramatic collapse in prices unlikely.

In the short term, oil is likely to swing between optimism over the talks and concern over shipping security, with U.S. government inventory data and geopolitical signals from next week's summit determining whether Brent can hold above $90. Over the medium term, a deal that reopens Hormuz, combined with continued OPEC+ output growth, could tip the market from shortage toward surplus and shift the price range lower. Even with a political agreement, however, the recovery of tanker traffic will depend on mine clearance, insurance costs and shipowners' willingness to take on risk, so the physical normalization of supply may lag well behind the price reaction. The tail risk is a breakdown in talks or a renewed wave of attacks in the strait, which could rebuild the war premium quickly. Meanwhile, Ukraine's continuing drone strikes on Russian refineries and export ports mean supply uncertainty in refined products is unlikely to fade anytime soon.