Global crude benchmarks retreated sharply on Thursday as escalating hopes for a diplomatic breakthrough in the Middle East prompted traders to unwind geopolitical risk premiums.
Front-month West Texas Intermediate crude futures dipped 3.9% to $92.29 per barrel, while Brent futures fell 3% to $94.80/bbl.
The sudden selloff reversed recent upward momentum, driven by a cooling of immediate geopolitical panic late Wednesday after Israel and Lebanon finalized a conditional ceasefire framework.
This diplomatic breakthrough has raised cautious optimism that Washington and Tehran might broker a broader backchannel agreement, particularly since Iran had previously conditioned any maritime de-escalation in the Persian Gulf on a total cessation of hostilities along the Lebanese front.
"However, the broader regional conflict remains unresolved and risks to energy supplies persist," Saxo Bank analysts said.
Analysts said flow through the Strait of Hormuz has edged up. "Traffic through the Strait of Hormuz, a vital waterway that normally handles around one-fifth of global oil and LNG shipments, has recovered modestly but remains well below pre-conflict levels, continuing to support a significant geopolitical risk premium across energy markets," they added.
As the Middle East conflict enters its fourth month, the Western hemisphere's buffer against sudden supply disruptions is rapidly drying up under the weight of robust international export demand and domestic refining runs.
In its official weekly report released on Wednesday, the US Energy Information Administration confirmed that domestic commercial crude inventories plummeted by a massive 8 million barrels for the week ended May 29, dragging total stockpiles down to 433.7 million barrels.
Market experts warn that until Middle Eastern oil flows normalize fully, global balances remain acutely exposed to sudden, violent price spikes as commercial stockpiles continue to thin.
"If the Strait stays closed beyond June, our framework implies that each additional month of disruption would lift average prices by roughly $5 in 3Q26 and $15 in 4Q26," J.P. Morgan noted.