Oil’s three-day slide exposes a dangerous flaw in the market’s Hormuz optimism

Oil extended its decline for a third session on Wednesday as traders increased bets that diplomacy would reopen the Strait of Hormuz.

Brent crude fell 1.2% to $78.44 a barrel by 3.30am GMT, while West Texas Intermediate dropped 1.4% to $74.70. Both benchmarks had settled more than 5% lower on Tuesday at three-week lows.

The retreat has a rational foundation, as Qatar says mediators are making progress, while US officials believe an agreement could come soon.

Yet prices are behaving as though safer shipping and recovering exports are close, even though tanker traffic remains depressed and another vessel was attacked near Oman.

The market is trading the deal, not the ships

The selling accelerated after Qatar said diplomatic contacts had reached advanced stages and mediators were exchanging proposals between Washington and Tehran.

US Treasury Secretary Scott Bessent said an agreement to reopen Hormuz could arrive by Wednesday, while Secretary of State Marco Rubio reported progress without a final deal.

ANZ Research analysts told The Wall Street Journal that optimism strengthened after Bessent’s comments. They added that Iran was reportedly considering allowing European countries to help remove mines from the waterway.

The timing is the problem.

ING strategists Warren Patterson and Ewa Manthey warned that the market could be “getting a bit ahead of itself”. Writing in ING Think, they said crude needed a recovery in tanker flows for the decline to become sustainable.

That evidence is missing, as the traffic through Hormuz and Bab el-Mandeb was little changed at the start of the week.

ANZ also said Gulf exports remained under pressure and transits had improved only marginally from depressed levels.

A ceasefire headline cannot make Hormuz safe

Diplomatic claims remain contradictory. President Donald Trump said the US held an “all-day negotiation” with Iran on Tuesday and predicted Hormuz would reopen soon.

Tehran has denied direct negotiations with Washington are taking place, while confirming separate discussions with Oman over safe shipping lanes.

The physical danger remains visible. A cargo vessel was struck by an unidentified projectile near Hormuz on Tuesday, forcing its crew to abandon ship and leaving one seafarer missing.

The Wall Street Journal reported that Persian Gulf oil exports were running at roughly 36% of pre-war levels.

A signed framework would not immediately restore insurance coverage, vessel availability or normal loading schedules.

Rystad Energy’s Jorge León recently described a narrow agreement as the firm’s base case, but “a considerably less comfortable one”.

Rystad assigned a combined 55% probability to stalemate or renewed fighting, showing why removing most of the geopolitical premium remains risky.

Inventories can deepen the fall, but flows decide its durability

Oil also faces conventional bearish pressure. American Petroleum Institute data indicated US crude inventories increased by about 2.7 million barrels in the week ended July 31.

Official Energy Information Administration figures were due later on Wednesday, so the industry estimate remained unconfirmed.

A confirmed build would strengthen the case that supply is outpacing near-term demand, and could push prices lower without a diplomatic breakthrough.

However, three indicators will determine whether the slide lasts: sustained growth in tanker crossings, a verifiable mine-clearing or safe-passage arrangement, and evidence that Gulf exports are recovering.