Oil slips on peace talks, but experts warn supply shock is underpriced

The oil market has been underpricing the current supply disruption from the Strait of Hormuz as optimism about peace talks clouded reality, experts said. 

Oil prices saw a dip on Tuesday, reversing the previous session's gains.

This drop is attributed to anticipated peace talks between the US and Iran this week, which could lead to increased oil supply from the critical Middle Eastern production area.

At the time of writing, the price of West Texas Intermediate crude oil was at $85.75 a barrel, down 1.9%, while Brent was at $93.97 a barrel, down 1.6%. 

Both oil benchmarks had soared on Monday, with Brent rising 5.6% and WTI 6.9%, following a fresh closure of the vital Strait of Hormuz by Iran. 

Iran’s actions, which blocked the key oil transport route, coincided with the US seizing an Iranian cargo ship as part of its ongoing blockade of Iranian ports.

Focus on fragile peace talks

Despite ongoing concerns about the potential for renewed conflict and its impact on oil supplies, investors are currently focused on the possibility that this week's negotiations will lead to either an extension of the current ceasefire or a comprehensive final agreement.

The primary objective is to create a lasting, workable solution that will allow for the continuous, long-term resumption of energy flows through the Strait of Hormuz, according to Warren Patterson, head of commodities strategy at ING Economics.

The US and Iran are scheduled to restart negotiations in Pakistan, with US Vice President JD Vance confirmed to attend, and an Iranian delegation also expected. 

This development is notable because it follows previous indications that Iran would refuse to participate as long as the US blockade remained in effect.

The current talks carry significant weight, particularly since the existing ceasefire is scheduled to expire on Wednesday.

Furthermore, President Trump has indicated that an extension of the ceasefire is improbable.

“Therefore, a lack of progress would likely push oil and gas prices higher. This would create significant uncertainty over when energy flows through the Strait of Hormuz might return to normal,” Patterson added. 

Worsening supply picture and prolonged recovery

The longer the supply disruptions last, the tighter the oil market will become, experts said. 

Consequently, even after hostilities cease, markets will face a prolonged period before normalisation, as both energy flows and upstream production will require significant time to recover.

“The supply picture has not stabilized; it has worsened, and the path back is considerably more complicated than markets appear to be pricing,” Rystad Energy said in an emailed commentary. 

The uncertainty surrounding the negotiations was highlighted by an Iranian official, who emphasised that a decision to attend has not yet been made.

Iranian Foreign Minister Abbas Araqchi further stated that ongoing US violations of the ceasefire are obstructing future talks.

Even with Rystad’s base case scenario—a swift and clean resolution to the current dynamic—supply recovery will not be immediate, which is an important consideration. 

“Taking these factors into account—along with the likelihood that any US–Iran agreement would remain fragile—it appears that while oil prices would face downside pressure, the market’s floor for the rest of the year is considerably higher than it was before the war,” ING’s Patterson said. 

The post Oil slips on peace talks, but experts warn supply shock is underpriced appeared first on Invezz