Oil prices sharply reduced earlier gains on Thursday after reports that the United States and Iran were discussing a possible phased agreement aimed at easing their conflict and reopening the Strait of Hormuz.
The talks reportedly include a framework under which Iran could reopen the crucial shipping route while Washington gradually lifts its economic blockade. No final agreement has been reached, and negotiations remain ongoing.
Oil Prices Pull Back From Earlier Highs
Crude oil had surged earlier in the session as expectations for a diplomatic breakthrough between Washington and Tehran weakened.
However, prices retreated from their highs following reports of renewed negotiations.
At 12:29 ET, Brent crude futures for November gained 1.8% to $104.95 per barrel, while West Texas Intermediate crude futures rose 2% to $94.01 per barrel.
Despite giving back part of their advance, both benchmarks remained firmly higher for the session.
U.S. and Iran Discuss Phased Agreement
Negotiators from the United States and Iran have been exploring a step-by-step framework during talks in New York, according to sources cited by Reuters.
One proposal would involve Iran reopening the Strait of Hormuz while the United States lifts its economic blockade against Tehran.
The proposal remains under discussion and does not yet represent a finalized peace agreement.
Both sides appear reluctant to surrender their most important sources of negotiating leverage without reciprocal concessions.
Strait of Hormuz Remains Critical for Oil Markets
The Strait of Hormuz has become one of the central issues influencing global oil prices.
Before the conflict, the waterway handled roughly one-fifth of global oil and liquefied natural gas shipments, making it one of the world’s most important energy routes.
Shipping activity through the strait has remained severely disrupted during the conflict, keeping global oil markets highly sensitive to diplomatic developments.
Iran has indicated that reopening the route could be possible if the United States reduces military pressure and lifts its blockade.
Oil Had Rallied on Rising Middle East Tensions
Brent crude settled more than 3% higher on Wednesday, while WTI gained nearly 2%.
The rally followed comments from Iranian President Masoud Pezeshkian at the United Nations General Assembly, where he maintained that Tehran would resist U.S. pressure while remaining open to diplomatic negotiations.
The remarks added to uncertainty surrounding the possibility of a near-term resolution to the conflict.
Recent statements from both Washington and Tehran have produced sharp swings in oil prices as traders attempt to assess the likelihood of further escalation or a diplomatic breakthrough.
Saudi Arabia and Iraq Increase Oil Flows
Oil markets have also been monitoring efforts by regional producers to increase supply through alternative routes.
Saudi Arabia has reportedly restarted operations along its east-west pipeline toward the Red Sea, helping reduce some dependence on the Strait of Hormuz.
Iraq has also increased exports, adding additional supply to the international market.
These developments have provided some relief from concerns about prolonged disruptions in Gulf energy shipments.
However, uncertainty surrounding Hormuz continues to command significant attention because of the enormous volume of global energy trade that normally passes through the waterway.
Higher Oil Prices Raise Inflation Concerns
The renewed rise in crude prices above $100 per barrel has also affected expectations for global interest rates.
Higher energy costs can increase inflation by raising transportation, manufacturing and consumer expenses.
Combined with resilient U.S. economic activity, stronger oil prices have contributed to expectations that central banks may keep monetary policy tighter for longer.
The Federal Reserve recently raised interest rates, with energy-driven inflation pressures among the factors being closely monitored by policymakers.
Analysts at BCA Research noted that higher oil prices have contributed to more hawkish expectations surrounding the future path of U.S. monetary policy.
U.S. Crude Inventories Unexpectedly Rise
Oil traders were also assessing the latest U.S. inventory figures.
U.S. crude stockpiles increased by 3 million barrels to 426.4 million barrels during the week ending September 18.
That contrasted with analyst expectations for a decline of approximately 640,000 barrels.
Meanwhile, gasoline inventories fell by 1.7 million barrels, while distillate inventories, including diesel and heating oil, declined by around 400,000 barrels.
Rising crude inventories can place downward pressure on oil prices because they suggest stronger supply or weaker demand.
Diesel Markets Face Additional Uncertainty
Energy markets were also affected by reports that the White House was considering a potential 90-day restriction on diesel exports.
The reports triggered a sharp decline in U.S. ultra-low-sulfur diesel futures.
Any restrictions on U.S. fuel exports could influence global refined-product supplies, particularly at a time when geopolitical tensions have already disrupted normal energy trade routes.
U.S.-Iran Talks Could Drive the Next Oil Move
Oil prices are likely to remain highly sensitive to developments in negotiations between Washington and Tehran.
A credible agreement that results in the reopening of the Strait of Hormuz could ease concerns about global supply disruptions and place downward pressure on crude prices.
However, a breakdown in negotiations could quickly revive fears of tighter supplies and renewed geopolitical escalation.
For now, U.S.-Iran diplomacy, the Strait of Hormuz and global energy supply conditions remain among the most important drivers for Brent and WTI crude prices.
