Global oil prices went down around 1 percent on Monday as renewed talks revolved around the United States and Iran calmed fears of potential near-term supply shortages.
Brent crude slipped below new highs, but U.S. West Texas Intermediate also moved lower. Traders responded to indications that diplomacy rather than confrontation could dominate in U.S.-Iran relations in coming weeks.
Officials from both sides said they are taking place indirectly, through the help of regional mediators. The talks are concentrated on sanctions relief, nuclear compliance and regional security. While not a deal anywhere near, the tone has moved away from escalation.
Markets responded quickly.
Iran contains some of the largest oil reserves in the world. Even some easing of sanctions might result in a return to world markets of more Iranian crude. Traders view that possibility as a stabilizing factor at a time when supply risks had helped to drive prices up.
The reduction in the price is also a reflection of shifting expectations around the risk in the Middle East. In recent weeks, fears of military clashes and shipping disruptions had supported oil prices. Those fears abated as diplomatic lines were re-opened.
Energy analysts warn that finding an increase in supply would take time. Sanctions remain in place. Infrastructure limitations also keep the rate of expansion of exports limited to Iran. Still, markets can and do trade based on what the market expects, rather than on a calendar.
The overall supply picture is further tight.
OPEC is continuing to manage output carefully. Several members are struggling with production targets. At the same time, the demand is still high in Asia and some parts of Europe.
However, outcome tone economics in the United States and China are also affecting the tone of sentiment. Recent data points to a slower industrial activity and lesser fuel demand growth. That puts pressure on prices with the geopolitical risk dying away.
U.S. officials emphasized talks with Iran are exploratory. They emphasized that no change of sanctions policy has been made. However, even cautious language would suffice to cool the market.
Transport costs in the Gulf region also decreased. There were indications that insurance premiums linked to conflict risk were levelling off. That further depressed upward pressure on crude prices.
Now investors are looking at two signals:
First, whether talks continue without having been interrupted. Second, whether OPEC+ reacts to lower prices by changing the output plans. Any surprise on either front could change the current trend.
For now, oil markets are changing from fear to balance. Diplomacy has not solved supply constraints but it has reduced the risk premium incorporated into prices.