Oil Prices Slip as Hopes for US-Iran Talks Ease Market Fears

Oil prices declined on Tuesday, reversing gains from the previous session, as expectations grew that talks between the United States and Iran could ease tensions and restore supply flows from the Middle East.

Brent crude fell by $1.04, or 1.1%, to $94.44 a barrel, while US West Texas Intermediate (WTI) dropped $1.66, or 1.9%, to $87.95. The more actively traded June WTI contract also declined, reflecting a broader cooling in market sentiment after a sharp rally a day earlier.

On Monday, both benchmarks surged following renewed disruption in the Strait of Hormuz, a key route for global oil shipments. The waterway was closed again after Iran reversed an earlier decision to reopen it, while the United States intensified pressure by seizing an Iranian cargo vessel as part of its ongoing blockade.

Despite those developments, investors are now focusing on diplomatic efforts expected later this week. Analysts say there is cautious optimism that negotiations could extend the current ceasefire or lead to a broader agreement, allowing oil shipments to resume more freely.

Analysts at ING noted that while markets reacted strongly to the latest disruption, current pricing suggests traders expect a diplomatic resolution. They warned, however, that the market may be underestimating the scale of the supply shock if disruptions continue.

A senior Iranian official indicated that Tehran is considering participation in talks expected to take place in Islamabad, following mediation efforts by Pakistan. The discussions aim to address the US naval blockade and stabilise the region. However, Iranian officials have stressed that no final decision has been made.

Abbas Araghchi said continued violations of the ceasefire by the United States remain a major obstacle to negotiations. Meanwhile, parliament speaker Mohammad Bagher Ghalibaf reiterated that Iran would not enter talks under pressure.

Shipping through the Strait of Hormuz, which handles about one-fifth of global oil supply, remains limited. Analysts warn that prolonged disruption could have serious consequences for global markets. Estimates from Citi suggest that if the situation continues for another month, supply losses could reach 1.3 billion barrels, potentially pushing prices toward $110 per barrel in the second quarter of 2026.

Elsewhere, Kuwait has reportedly declared force majeure on some oil shipments due to the blockade, adding to concerns about supply stability.

Higher prices linked to the disruption have already reduced global oil demand by about 3%, according to analysts at Société Générale. They warned that risks remain tilted toward further losses if normal shipping operations are not restored soon.

While markets are currently guided by hopes of diplomatic progress, uncertainty continues to dominate as traders weigh the possibility of renewed conflict against the prospect of a negotiated settlement.