Explained: Why crude oil prices tumbled over 9% to below $90/bbl in one day

Crude oil prices plunged more than 9% to $88/barrel on Monday, providing major relief to global equity markets after the US paused its strikes on Iran and Tehran signalled it would not retaliate further. Oil prices had surged to $100/barrel after the US resumed strikes on Iran a fortnight ago, but the latest developments have raised hopes that diplomatic efforts could help de-escalate the conflict.

A key trigger behind the sharp fall in oil prices appears to be China's reported push for Pakistan to help revive peace talks between the US and Iran. The US military halted its two-week-long strikes on Friday as diplomats sought to give negotiations "some space". Iran, which has also refrained from military operations against regional targets in recent days, said it would reciprocate following a China-backed diplomatic initiative routed through Pakistan.

According to a Reuters report, Pakistan's efforts to revive US-Iran talks are backed by China. "The Chinese are unhappy because Iran's attacks on other Gulf states and the closure of the Strait of Hormuz are hitting their interests," a Pakistani government official told Reuters.


Pakistan is exploring ways to restart stalled US-Iran negotiations aimed at ending their nearly five-month-old conflict, following China's diplomatic initiative, Reuters reported.

The diplomatic push comes against a complex regional backdrop. Last week, Yemen's Iran-backed Houthi movement announced a naval blockade against Saudi Arabia, a close ally of Islamabad that signed a mutual defence treaty with Pakistan last year. Pakistan depends on Saudi financial support and has strongly condemned recent Houthi attacks on the kingdom. A stance perceived as too sympathetic to Iran could therefore strain Islamabad's ties with Riyadh.

At the same time, Pakistan remains heavily reliant on Beijing, which has provided significant financial support and has strategic and economic interests in a diplomatic resolution that would help reopen key trade routes across the Middle East.

But risks remain

The pause in attacks has not yet translated into a return to normal shipping activity. Fewer than 10 commodity vessels crossed the Strait of Hormuz each day over the weekend, according to shipping data from Kpler.

Traffic through the Bab el-Mandeb Strait also fell on Sunday after Yemen's Houthis attacked Saudi oil installations along the Red Sea coast. A third Chinese supertanker, however, managed to exit through the Bab el-Mandeb Strait.

The prospects for a lasting peace still face serious challenges, with negotiators needing to reach an agreement on contentious issues such as the future of Iran's nuclear programme, sanctions relief, and Tehran's support for its proxy groups in the Middle East.

For the oil market, one of the most important issues will be securing maritime safety and restoring toll-free, two-way traffic through the strategically vital Strait of Hormuz. The strait, through which a fifth of global oil supply flowed before the conflict, remains closed as the US maintains its blockade.

Oman, which sits on the opposite side of the strait from Iran, has emerged as a key player in the negotiations. An Omani delegation was reportedly in Tehran on Friday and Saturday in an effort to negotiate a provisional arrangement to manage shipping transit through the waterway.

Where is oil headed?

The risks to oil prices remain significant if the disruption continues. JPMorgan said in a note that every additional month of disruption to oil supplies could add around $7-$8 per barrel to Brent prices. If the disruption lasts for three months, average Brent prices could rise to around $114/barrel.

Goldman Sachs has warned that Brent crude could climb to $120/barrel if disruptions to shipping through the Strait of Hormuz, the world's most important oil transit route, persist. Its base case, however, is that tensions in the Middle East will eventually ease.

If the conflict does subside, Goldman Sachs expects Brent to average $80/barrel in the fourth quarter and $75/barrel next year. The bank said the risks to those forecasts remain "tilted to the upside", citing the possibility of continued disruptions to shipping through both the Strait of Hormuz and the Red Sea.

Anindya Banerjee, Head of Commodity Research at Kotak Securities, said geopolitical developments were once again driving crude oil prices. "Any strike on major Gulf export infrastructure could force a retest of $95-$100 and beyond," he said.

According to Banerjee, the market is increasingly looking beyond military strikes and focusing on the declining chances of a diplomatic breakthrough. Tehran has imposed new conditions for restarting negotiations, he said, while each fresh development is delaying the restoration of normal tanker traffic through the Strait of Hormuz. Shipping activity through the waterway remains well below pre-war levels.

Even after today's sharp correction, crude remains close to 30% higher over the month, and with shipping through the Strait of Hormuz still running well below normal, the underlying supply risk has not disappeared, even as headline pressures ease.

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