Crude oil prices rise 10% this week but China enters fray to push for end to Iran war. What’s next?

Crude oil futures fell more than 4% on Friday after reports that China had begun efforts to revive stalled peace talks between the United States and Iran. Despite the sharp decline, both Brent and West Texas Intermediate remained on course for significant weekly gains.

Crude oil price on this week

Oil prices had surged earlier in the week as the United States and Iran traded missile strikes, shipping through the Strait of Hormuz dropped to a trickle and Yemen's Houthis launched attacks on vessels in the Red Sea.

Brent crude settled at $96.78 a barrel on Friday, down $3.91, or 3.88%. It had closed above $100 in the previous session for the first time since May and was still heading for a weekly gain of nearly 10%.


U.S. West Texas Intermediate crude ended the session at $89.31 a barrel, falling $2.88, or 3.12%. The contract was on track for an 8.27% increase over the week.

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Pakistan is looking at ways to help restart the stalled U.S.-Iran negotiations aimed at ending their nearly five-month-old war, according to a Reuters report, adding that the move follows an initiative from China.

Earlier this 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 Saudi Arabia. Taking a position that is seen as too sympathetic to Iran could therefore strain ties with Riyadh.

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

Tensions remain high

U.S. President Donald Trump has promised "major military punishment" against Iran and its Houthi allies following attacks on two Saudi oil tankers in the Red Sea.

Iran had been pushing the Houthis to shut the Bab el-Mandeb gateway to the Red Sea if the United States continued its attacks on Iranian power infrastructure. The route is the second most important passage for energy shipments after the Strait of Hormuz, located at the entrance to the Gulf.

The Houthis also announced on Monday that they were imposing a naval blockade on Saudi Arabia. Saudi Arabia had been using pipelines to reroute its oil and bypass the closure of the Strait of Hormuz by Iran.

Supply concerns have also emerged elsewhere. Kazakhstan's energy ministry said on Thursday that oil producers had temporarily cut output after suspected Ukrainian drone attacks led to the closure of the country's main Black Sea export terminal.

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What are experts saying?

JPMorgan said in a note that every additional month of disruption to oil supplies could add around $7 to $8 a barrel to Brent prices. If the disruption lasts three months, monthly average Brent prices could rise to around $114 a barrel.

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

If the conflict does subside, Goldman Sachs expects Brent to average $80 a barrel in the fourth quarter and $75 next year. The bank said the risks to those forecasts remain "tilted to the upside", pointing to 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.

Banerjee said the market was 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.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)