Energy Post: US-Iran Ceasefire Hopes Rise, Oil Prices Drop 16% Over Three Days, Hitting Two-Week Low

The United States and Iran have not engaged in military conflict for several consecutive days, and the market has taken a cautiously optimistic attitude towards the prospects of diplomatic negotiations. This has led to a significant drop in international oil prices on Tuesday (28th) by approximately 5%, marking the third consecutive trading day of decline and reaching the lowest level in two weeks. However, market participants point out that shipping in the Strait of Hormuz remains well below normal levels, and the supply risk in the Middle East has not been eliminated. Oil prices may still experience significant volatility in the short term depending on the development of the situation.

Brent crude oil futures fell by $4.27, or 4.8%, closing at $84.09 per barrel; West Texas Intermediate (WTI) crude oil futures fell by $3.35, or 4.1%, closing at $79.26 per barrel. Over the past three trading days, Brent crude has cumulatively plummeted by approximately 16%, with the closing price hitting a new low since July 13th; WTI has fallen to its lowest level since July 16th.

The drop in oil prices primarily reflects market expectations that the temporary ceasefire between the US and Iran may create an opportunity for diplomatic negotiations. However, the fundamental problem causing global energy supply disruptions has not been resolved. Before the war, about one-fifth of the world's oil was transported through the Strait of Hormuz, and the shipping lane has not yet returned to normal, with energy logistics still facing severe restrictions.

US President Trump recently stated that the United States and Iran are engaged in "good negotiations" and hinted that there is a possibility of reaching an agreement between the two sides. However, he also warned that if diplomatic efforts fail, the US may resume military strikes. However, Iran has denied resuming negotiations with the United States, creating a clear discrepancy with the White House's statement and highlighting that the two sides still have a considerable distance to go before reaching a true agreement.

According to informed sources, Oman has proposed a management plan for the Strait of Hormuz on behalf of the Gulf countries, including the voluntary collection of transit fees from shipping companies, aiming to restore maritime order and reduce conflict risks. However, Iran has rejected the plan and proposed a temporary arrangement to Oman, suggesting that when the Strait of Hormuz is reopened, some two-way lanes should temporarily be managed by Iran's territorial waters as a transitional measure to restore shipping.

Bob Yawger, the head of energy futures at Mizuho Securities, stated that the reason the market continues to unwind the war risk premium is mainly because the US and Iran have not attacked each other in recent days, not because the supply has truly recovered. He pointed out that the flow of ships in the Strait of Hormuz remains at a low level, coupled with the fact that the Houthi armed forces in Yemen continue to launch attacks in the Red Sea, and the energy supply risk in the Middle East still exists.

The latest shipping data shows that the Bab el-Mandeb Strait had 28 vessels pass through on Monday, marking a new high in four days, but the flow of ships in the Strait of Hormuz remains significantly low. The Houthi armed forces on Tuesday also claimed to have fired a ballistic missile at a Saudi Arabian oil tanker; on the other hand, China has directly entered into negotiations with the Houthi armed forces, aiming to ensure that Chinese tankers can safely navigate the southern Red Sea shipping lanes.

Additionally, according to a report obtained by Reuters from the energy consulting firm IIR, Saudi Aramco, the state-owned oil company of Saudi Arabia, suspended the operation of its Jizan refinery with a daily capacity of 400,000 barrels on July 27th due to the recent attack by the Houthi armed forces on related facilities. Due to the obstruction of Red Sea shipping, Saudi Aramco is also evaluating adjusting the pricing mechanism for Asian crude oil exports via the Egyptian port of Sidi Kerir to reflect the increased transportation costs after rerouting through the Suez-Mediterranean pipeline.

In addition to the Middle East situation, the market is also paying attention to the possibility of new developments in the Russia-Ukraine war. Ukrainian President Zelensky stated that he had discussed the resumption of Russia-Ukraine peace talks with Trump in a phone conversation. The market believes that if Russia and Ukraine reach an agreement in the future and lead to the lifting of some sanctions against Russia, Russia's oil export volume may increase. According to US energy data, Russia is expected to be the world's third-largest crude oil producer in 2025, following the United States and Saudi Arabia.

On the supply side, informed sources revealed that the Organization of the Petroleum Exporting Countries and its allies (OPEC+) will suspend production increases for three months starting in October after completing the previous plan to return voluntary production cuts to the market. Analysts believe that this move is expected to provide some support for oil prices. However, if US-Iran talks break down or the Middle East situation heats up again, oil prices may quickly rebound, and market volatility is likely to continue.