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US Oil Update: Futures Tumble as Pause to US-Iran Hostilities Appears to Hold

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Crude oil futures tumbled in midday trading on Monday, as a halt to tit-for-tat military strikes between the US and Iran entered a second consecutive day, easing immediate concerns over global supply disruptions.

Front-month West Texas Intermediate crude futures tumbled 7.2% to $82.88 per barrel, while Brent futures plunged by 8% to $89.02/bbl.

Since Friday, the US has held off on new military strikes against Iranian targets, following 13 straight nights of attacks aimed at degrading Tehran's ability to disrupt commercial shipping in the Strait of Hormuz.

Iran reportedly signaled that it would stop carrying out attacks on its Gulf neighbors as long as the US also refrains from striking, as Tehran held talks with Oman over the Strait of Hormuz.

Earlier on Monday, Iran's Foreign Ministry spokesman, Esmail Baghaei, said that talks between Tehran and Muscat have no connection whatsoever with the US and are ongoing.

Baghaei also said that while "it's possible that mediators share messages from the US side about current developments," no formal peace negotiations between Iran and the US are currently taking place.

However, Saudi Arabia's Ministry of Defense on Monday intercepted drones from Iraq and Yemen's Houthis targeting its oil facilities.

Soojin Kim, research analyst at MUFG, said that although the pause in US military action has eased immediate supply fears, constrained maritime traffic across key export routes suggests geopolitical risk remains elevated.

The defense ministry said in a social media post that the Gulf state's air defenses intercepted and destroyed several drones that targeted petroleum facilities in the country's Eastern Province and Riyadh region.

On Monday, the Houthis also said they launched drone attacks on Saudi Arabian oil infrastructure in response to incursions by the Gulf state's drones.

Yahya Saree, the Houthis' spokesperson, said that several targets in the supply and transport of crude oil from eastern Saudi Arabia to Yanbu were struck by several drones.

Saudi Arabia has re-routed its crude output to Yanbu via its east-west pipeline to get around Iranian attacks on shipping in the Hormuz.

"For months, the market treated Yanbu as the answer to Hormuz risk. The problem is that Yanbu has its own chokepoint," Ian Solis, data analyst, Tech/Maritime-Ops for Wood Mackenzie, said, adding that if Bab al-Mandeb comes under sustained disruption, Asian markets stand to lose a major crude supply artery.

Meanwhile, traffic through Hormuz, through which 20% of the world's oil and liquefied natural gas supplies flowed before the conflict, remains restricted, with the latest shipping data showing only 29 confirmed crossings between July 24 and 26.

Bab el-Mandeb, by comparison, recorded 100 verified crossings, with 51 vessels entering the Red Sea and 49 exiting.

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Oman crude exports averaged over 850,000 b/d in the same month.Sean Lui, Argus' freight specialist, said some Asian buyers are already considering rerouting Saudi crude around the Cape of Good Hope as Red Sea security risks rise, although some Chinese-owned very large crude carriers continue using the route."A switch to the longer route will add roughly 30 days to the journey time, at a minimum," Lui told.This would increase ton-mile demand, tightening tanker supply and lifting freight rates across regional markets.The freight analyst noted that only Saudi-linked vessels currently appear to face direct threats, while ships loading at other Red Sea ports or transiting the area have faced limited disruption despite the deteriorating security environment.Almost no Murban exports transit the Red Sea, Ng said. Most exports depart for Asian markets, and so any halt in flows through the Bab el-Mandeb Strait will only cause "minimal logistical disruptions for Asian buyers."Kpler's Das said Bab el-Mandeb carries only a small share of UAE crude exports, with flows totaling about 17,000 b/d in April, 65,000 b/d in May, 63,000 b/d in June and roughly 39,000 b/d in July.Those shipments represented less than 2%-3% of the UAE's total crude exports of roughly 2.5 million b/d to 3 million b/d, while most Murban cargoes destined for Asia bypass the Red Sea entirely, Das said.Kpler data estimated that combined Middle East crude imports into China, India, South Korea, Japan, Singapore and Thailand fell from about 13.4 million b/d in January to below 7 million b/d in April before partially recovering by July.China's imports alone dropped from more than 5 million b/d in January to roughly 1.4 million b/d to 2.4 million b/d during the worst months, before dark-routing capacity helped restore some lost flows, according to Das.In a normalization scenario, Das said that a verified US-Israel-Iran ceasefire, a Houthi halt to attacks and a recovery in visible Strait of Hormuz traffic would provide the clearest signal for prices to normalize.Murban's premium could narrow within one to three weeks, while Brent and West Texas Intermediate may need four to eight weeks to stabilize, Das added.Argus also expects clear commitments from the US and Iran to end hostilities, restore safe navigation and increase shipping traffic before Brent-Murban spreads and crude prices return to more typical levels.On any signals that Murban-Brent spreads are normalizing, Ng said that, given the uncertainty surrounding broader risks tied to the Middle East, de-escalation would require clear statements from the US and Iran.