Oil ticks up as US-Iran talks fail to assuage supply fears

OIL ticked higher as strong demand for physical barrels collided with easing supply disruptions in the Middle East and progress towards reopening the Strait of Hormuz, though repeated false starts have left traders sceptical.

West Texas Intermediate futures settled below US$93 a barrel on a day of choppy trading, after rising by as much as 4.5 per cent during the session.

US President Donald Trump is willing to give Iran sanctions relief and release frozen funds for concrete progress on the nuclear issue, according to a US official. Iran’s nuclear programme is a key sticking point for both sides.

Traders have been parsing conflicting signals on progress towards a US-Iran ceasefire and a reopening of the vital waterway.

Bloomberg reported that Iranian officials have privately expressed pessimism about reaching a deal before the US midterm elections in November.

Trump said that talks with Iran were held on Monday (Sep 28) through mediators. The US president earlier rejected a proposal by Teheran to reopen Hormuz if Washington made some concessions.

The stark shift in tone over the span of a day highlights the whiplash-inducing rhetoric traders have had to navigate since the conflict began seven months ago.

“Without a concrete deal or conclusion to the conflict, the market is quickly fading initial headline reactions and higher prices are becoming harder to shake,” said Ryan McKay, senior commodity strategist at TD Securities.

“The market is increasingly worried about escalation via Iran or the Houthis prior to midterm elections, or from the US post midterms.”

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The volatility in oil spilled over into wider markets, dragging down stocks and deepening a selloff in the US bond market on inflation concerns that could trigger more US Federal Reserve interest rate hikes.

Further pressuring oil prices, Saudi Arabia has restored about half the flows through its East-West pipeline that was struck by drones earlier this month, bringing total flows through the key conduit to about 3.5 million barrels a day.

The cross-country pipe has been a vital route for the kingdom’s exports during the war with Hormuz constrained.

Despite resumed negotiations, the fundamental outlook is turning increasingly bullish.

Key gauges of supply tightness have spiked in recent days, a sign of a clamour for barrels that can be delivered quickly, while fuel prices are surging as global refinery capacity remains hobbled.

“In the absence of a decisive end to the conflict in the Middle East, the balance of risks remains skewed towards higher oil prices,” said Hamad Hussain, senior climate and commodities economist at Capital Economics.

Brent is up over 75 per cent this year and oil products continue to soar even higher.

Diesel has also been pushed higher by the Russia-Ukraine war, while uncertainty has continued to mount over US measures to curb record prices for the fuel.

Over the weekend, Trump said the White House was looking at curbs on diesel exports “very seriously”.

There are also signs that the market for real-world oil barrels is coming increasingly under pressure.

Fallout from the Iran war has shrunk the availability of the very large crude tankers used to transport barrels around the world, sending shipping rates to record highs.

Brent’s prompt spread – the difference between its two nearest contracts – has widened to over US$7 a barrel, from less than US$1 at the end of last month.

The bullish pattern, known as backwardation, is a classic indicator of a tight market. In Europe, Dated Brent, a critical physical-market benchmark, has been trading at a wide premium to futures. BLOOMBERG