Oil prices have recovered from a six-week low amid growing uncertainty over the outlook for a peace deal to end the war in Iran. According to Bloomberg, Brent crude climbed toward $93 a barrel after ending Friday at its weakest level since mid-April, while US benchmark West Texas Intermediate traded near $89 a barrel. This recovery comes as the US and Iran exchanged proposed amendments to a draft agreement over the weekend that would extend the current ceasefire and pave the way for a reopening of the Strait of Hormuz, though there was little indication that a final breakthrough was imminent. The standoff follows a bout of optimism that some form of peace agreement would be reached, which had caused the first monthly drop in crude prices this year before the latest uncertainty set in. Oil markets have swung sharply in recent weeks as traders alternated between fears of prolonged supply disruption and hopes for a diplomatic resolution, with Brent remaining more than 25% higher than levels seen before the conflict erupted in late February.
President Donald Trump said after a White House Situation Room meeting on Friday that he expected to announce an extension of the current truce with Iran by 60 days. In a social media post earlier that day, he reiterated his demands, including that Iran suspend its nuclear program and fully restore the strait to its earlier status as a free, international waterway. The semi-official Tasnim news agency, which has close ties to the Iranian Revolutionary Guard Corps, said Sunday that amendments continue to be proposed by both sides, but noted that both the US and Iran might ultimately reject the changes and the deal would collapse. Iran's Foreign Ministry said no final understanding has been reached yet, with spokesman Esmail Baghaei telling the state-run Islamic Republic News Agency that message exchanges between the two countries are continuing.
The European Union is considering a temporary freeze to its price cap on Russian oil as the Middle East conflict enters its fourth month, according to reports from The Hindu BusinessLine. The bloc adopted a dynamic mechanism last year to ensure the price cap is automatically set every six months at 15% lower than the average market rate for Russian Urals crude, with the current threshold at $44.10 per barrel due for review later this summer. Under the current cap, European firms are banned from providing services such as insurance and transportation involving oil sold above the threshold. The next price cap review in July would likely see the level rise to at least $65, higher than the previous $60 threshold set collectively by the Group of Seven, as oil prices have soared due to the Iran war and effective closure of the Strait of Hormuz.
Adding to market concerns, Israel expanded military operations in Lebanon over the weekend as Hezbollah intensified attacks in northern Israel. Bloomberg reports that Tel Aviv is not party to the talks between Washington and Tehran and it's not clear whether it will agree to stop its side war in Lebanon. This regional escalation adds another layer of complexity to the already volatile situation, with independent economist Hamzeh Al Gaaod noting that neither Iran nor the US are capitulating or compromising on their red lines for an agreement, some of which have not changed since before the war. The broader regional conflict continues to cloud the outlook for Middle East energy supplies, with the near-total closure of the Strait of Hormuz injecting significant geopolitical risk premium into prices.
Despite ongoing uncertainties, tanker traffic has shown tentative signs of improvement as the conflict enters its fourth month. Roughly a quarter of the non-Iranian large oil tankers stranded in the Persian Gulf when the conflict began have reportedly managed to leave the region, offering a modest sign that supply bottlenecks may gradually ease if diplomatic progress continues. However, several vessels transiting through the Strait of Hormuz had been attacked in recent days, underscoring the "very real" risks that remain for shipowners. Dennis Kissler from BOK Financial Securities noted that "Iran will have to abide by all agreements, and that in itself is a large ask for the market," adding that while a pickup in Strait of Hormuz traffic is promising, prices need to stabilize for justification in the mid-to-low $80/barrel area. The near-total closure of the Strait of Hormuz has disrupted global oil flows and injected a significant geopolitical risk premium into prices, as the waterway typically handles a substantial share of the world's seaborne crude exports.
