Oil prices decreased further on Tuesday, reaching their lowest points in over a week as optimism for a resolution to the US-Iran tension increased and traders continued to monitor events in the Middle East.
Brent crude futures dropped by $1.75, or 1.98 percent, to $86.61 by 0739 GMT, hitting their lowest level since July 17.
US West Texas Intermediate crude stood at $81.35 per barrel, down $1.26, or 1.53 percent, marking its lowest since July 20.
US President Donald Trump mentioned on Monday that Washington was engaged in positive discussions with Iran and the possibility of a resolution existed. However, he stated that US strikes would resume if negotiations failed. Iran also stated its readiness for retaliation.
According to UBS analyst Giovanni Staunovo, despite the low vessel traffic through the Strait of Hormuz, the market is optimistic about a potential improvement following discussions between Oman and Iran on a new mechanism for the Strait.
Oman proposed a joint regional mechanism to manage the Strait of Hormuz with voluntary fees to Iran, as per a Gulf source informed Reuters on Tuesday.
The Strait of Hormuz, responsible for approximately a fifth of global oil consumption, is a critical oil shipping chokepoint globally.
The conflict has disrupted shipping not only in the Strait of Hormuz but also in the Bab el-Mandeb strait.
Although concerns arose last week about potential closures in the Bab el-Mandeb route due to attacks, the number of vessels passing through increased to 28 on Monday, a four-day high, while traffic through the Strait of Hormuz remained low, according to Kpler shipping data.
Analysts cautioned that the threat of supply disruptions expanding to the Red Sea remains high after Saudi Arabia reported shooting down drones targeting petroleum facilities, including in Riyadh, launched by Iran-backed groups from Iraq.
Meanwhile, Iranian Houthi allies in Yemen announced targeting the East-West Pipeline delivering oil to Saudi Arabia’s primary Red Sea port of Yanbu in response to Saudi drone intrusions.
Goldman Sachs predicted a potential decrease in Brent prices to $80 by the end of the year if the Hormuz fully reopens in the fourth quarter. However, disruptions in the Red Sea and attacks on Saudi oil infrastructure may introduce new risks of increasing crude and refined products prices.
A preliminary Reuters poll on Monday suggested that US crude oil inventories likely declined last week along with gasoline, while distillate stocks probably rose.
