Oil prices fell by about 1% during trading on Wednesday, after US President Donald Trump reiterated that the war with Iran could end very quickly, in a sign that boosted market hopes for a possible political agreement to ease tensions in the Middle East.
Brent crude futures fell by $1.11, or 1.0%, to $110.17 a barrel, while U.S. West Texas Intermediate crude futures declined by $1.12, or 1.1%, to $103.03 a barrel.
Emreel Jameel, senior oil research analyst at the London Stock Exchange Group, said benchmark prices fell as investors assessed the prospects for a political agreement, but markets are still closely monitoring the fallout from the geopolitical landscape.
He added that oil prices could retain their ability to rise even if an agreement is reached, because supplies are unlikely to return to their pre-war levels immediately.
Markets are awaiting a genuine agreement between Washington and Tehran.
Crude oil prices had lost about $1 during Tuesday's session following comments by US Vice President J.D. Vance, who confirmed that the United States and Iran had made progress in talks, and that neither side wanted to return to military action.
Toshikata Tazawa, an analyst at Fujitomi Securities, said investors are trying to assess whether Washington and Tehran are actually capable of finding common ground and reaching a peace agreement, especially given the daily changes in US positions.
He explained that oil prices are likely to remain at high levels due to the possibility of renewed US strikes against Iran, in addition to the fact that oil supplies will not quickly recover to their normal levels even if an agreement is signed.
Despite Trump's assurances to members of Congress on Tuesday evening that the conflict would end quickly, he had previously stated that the United States might have to launch new strikes against Iran, indicating that he was only an hour away from ordering an attack before deciding to postpone it.
Mutual threats and expectations of Brent crude rising to $120
Trump's remarks came just one day after he announced the suspension of military operations following Washington's receipt of a new proposal from Tehran to end the US-Israeli war against Iran.
The US president also asserted that Iranian leaders are begging for a deal, warning that a new US attack could occur within days if a settlement is not reached.
In this context, Citi raised its short-term forecast for Brent crude to $120 a barrel, arguing that markets are not fully pricing in the risk of continued supply disruptions or the broader collateral risks associated with the conflict.
The bank believes that the current uncertainty, coupled with the fragility of global energy flows, could push prices to higher levels if the crisis is prolonged.
The Strait of Hormuz remains under pressure and US stockpiles are declining.
Despite the recent success of some oil tankers in crossing the Strait of Hormuz, the number of ships passing through is still far below the daily average of about 130 ships before the outbreak of the war.
Two supertankers left the strait on Wednesday, while a third tanker continues its journey abroad after being stuck in the Gulf for more than two months, carrying 6 million barrels of crude oil from the Middle East.
To cover the global supply shortages caused by the war, countries began to rely increasingly on their commercial and strategic stockpiles.
In the United States, data from the American Petroleum Institute showed that crude oil inventories fell for the fifth consecutive week last week, and fuel stocks also declined, indicating continued strong demand and tightening market conditions.
A Reuters poll estimates that data from the U.S. Energy Information Administration, due later today, could show a further decline in crude inventories of about 3.4 million barrels during the week ending May 15, which could provide additional support for oil prices if these figures are confirmed.
