Markets react to a lull between the US and Iran, oil prices drop sharply

The oil market began the week with a sharp decline as traders shrugged off part of the geopolitical risk premium accumulated over the last nearly two weeks of US-Iranian strikes. The reason is the signal that both Washington and Tehran are ready to return to negotiations. The price of Brent fell toward $91 per barrel, and WTI dropped below $84, while European natural gas also corrected following weeks of price increases.

A pause after 13 nights of strikes

The retreat in prices came after a visible mutual cessation of hostilities over the weekend. Iran reported that for the second consecutive night there were no US strikes, and an Iranian military official stated on state television that since the US stopped the attacks, Iran had also ceased its retaliatory actions. According to sources in the Pentagon, the situation is described as a "pause," reports CNN.

White House Communications Director Steven Cheung stated that President Trump "prefers a diplomatic solution, though he leaves all options open if Iran continues terrorist activity in the Strait of Hormuz." A regional official involved in the mediation efforts described the mutual pause as an "encouraging sign that supports de-escalation efforts," adding that both sides are seeking to return to a temporary truce, under which Iran would ensure shipping through the strait with fewer restrictions.

From $100 to a rapid reversal

The sell-off marks a sharp turn after last week's rally, when Brent surpassed $100 per barrel for the first time since May, after the Yemeni Houthi movement claimed it had struck two Saudi oil tankers in the Red Sea. WTI had also climbed above $91 during the week while the US Central Command conducted a 13th consecutive night of strikes on Iranian military facilities. For the week ending Friday, Brent rose by about 10%.

European natural gas prices, which had risen by nearly 50% over the previous month and crossed 62 euros per megawatt-hour, also declined, according to the Financial Times. The pause in the conflict eased concerns regarding the transit of liquefied natural gas through the Strait of Hormuz.

Analysts on the risk

Despite the temporary relief, analysts warn that the pause remains fragile. On Friday, Trump told reporters that he had not yet decided whether to order large-scale strikes on Iran, emphasizing that Tehran is "serious," but the US remains "in full combat readiness." The Houthis continue attacks against Saudi shipping infrastructure - the group claimed to have struck two Saudi tankers, known as Incilia and Layla. In response, Saudi Arabia conducted strikes against the Houthis over the weekend.

Daniela Hathorn, senior market analyst at capital.com, noted that "the increasing instability around key shipping routes" has once again created a "palpable geopolitical risk premium" in the oil market, and "geopolitical risks are unlikely to disappear in the near future." UBS predicts Brent will fall to $85 per barrel by the end of the year, but acknowledges that disruptions to shipping through the Strait of Hormuz will continue to keep the market tense.