Oil prices extended their decline on Thursday as expectations of renewed diplomatic efforts around the Strait of Hormuz raised hopes that disruptions to Middle East energy supplies could ease. Brent crude futures fell 0.7 per cent to $87.24 a barrel in early trade, marking a fourth consecutive session of losses. West Texas Intermediate (WTI) crude declined 0.7 per cent to $81.67 a barrel, extending losses for a fifth session.
Hormuz Talks Raise Hopes Of Supply Relief
Iran and Oman are working to finalise an arrangement concerning control of the Strait of Hormuz, after Iran's Revolutionary Guards said the two countries had reached an understanding over management of the waterway and its revenues.
The Strait of Hormuz is one of the world's most important energy corridors. Before the US-Israeli war with Iran began on February 28, oil and natural gas shipments passing through the strait were equivalent to about one-fifth of global consumption. Ship-tracking data indicates that oil flows have since fallen to roughly a quarter of their pre-war levels.
Expectations that the waterway could reopen have consequently reduced some of the geopolitical risk premium in crude prices. However, concerns over shortages remain as negotiations continue and substantial volumes of Middle Eastern supply remain disrupted.
Qatar's prime minister is also expected to visit Iran on Thursday in an effort to restart diplomatic negotiations aimed at ending the nearly six-month conflict. The US has halted attacks on Iran for around a month while increasing economic pressure on Tehran.
Significant differences nevertheless remain between the parties. Iranian officials have indicated that the Strait of Hormuz will not reopen unless Washington meets Tehran's conditions under an interim ceasefire agreement reached in June that subsequently unravelled.
Diesel Supplies Remain Under Pressure
While prospects of easing disruption in the Gulf have weighed on crude prices, refined-product markets continue to face supply pressure. Middle Eastern refinery capacity has been affected by the conflict, while Ukrainian attacks on Russian refineries have reduced exports from another major supplier of diesel.
US inventory data has reinforced concerns over tightening supplies. Distillate inventories, which include diesel and heating oil, fell by 2.2 million barrels in the week ended August 21 to 103.4 million barrels, according to the US Energy Information Administration.
The combination of reduced refinery output and low inventories means that supply risks remain despite the recent decline in crude prices. Developments around the Strait of Hormuz and diplomatic negotiations with Iran are likely to remain key drivers for global oil markets.