Oil falls below $80 on shipping hopes, but route to normal supply stays dangerous

Oil prices slipped on Thursday as investors bet that progress between Iran and Oman could bring the Strait of Hormuz closer to reopening, although fresh threats to Red Sea shipping kept the market from treating a deal as a clean end to the region’s supply crisis.

Brent crude futures fell 0.4% to $79.12 a barrel by 4.18 am GMT, dropping back below $80. West Texas Intermediate declined 0.6% to $74.80.

The moves left both benchmarks near levels reached after the temporary US-Iran agreement in June, when traders first anticipated a recovery in Gulf exports.

Hormuz optimism pushes the risk premium lower

Iran and Oman have agreed on the coordinates of a proposed shipping route through the strait and are finalising a joint statement.

Tehran has indicated that the arrangement would still depend on outside powers, particularly the US, not obstructing the process.

The emerging framework could place vessels entering the Gulf on an Iranian-controlled route, with outbound traffic overseen by Oman.

That structure remains politically sensitive because Washington has opposed any arrangement that would allow Tehran to control access or charge fees in one of the world’s most important energy corridors.

Nomura economist Yuki Takashima said progress in the talks had encouraged renewed selling in crude.

He noted that prices had returned to levels seen around the June 17 interim agreement, leaving the market focused on whether the US and Iran can convert another temporary understanding into a lasting settlement.

The stakes remain high. The Strait of Hormuz carried 20.9 million barrels a day in the first half of 2025, equal to about 20% of global petroleum consumption.

Saudi and UAE pipelines can bypass the waterway, but their combined alternative capacity covers only a fraction of normal flows.

A shipping deal would not end the supply squeeze

The market’s initial reaction suggests traders expect an agreement to unlock more Gulf barrels.

Yet physical exports remain far from normal. Gulf crude and condensate shipments in July were about 40% below pre-war levels, showing that diplomatic progress has not yet translated into a full recovery in tanker traffic.

ING analysts view the direction of direct US-Iran negotiations as the decisive factor.

Without progress between Washington and Tehran, they argue that disrupted energy flows are unlikely to normalise sustainably even if Iran and Oman settle the route’s technical details.

The Energy Information Administration expects global production and trade to move closer to pre-conflict levels by year-end.

It has forecast Brent to average $74 a barrel during the third quarter, but that projection assumes the recovery in Gulf supply continues without another major disruption.

ING has separately warned that Hormuz traffic remains below pre-war levels and that renewed military escalation could quickly disrupt the supply recovery.

Its current outlook assumes Brent averages about $80 in the third quarter before easing later in the year.

Red Sea attacks and US inventories limit the decline

That assumption is already being tested beyond Hormuz.

Yemen’s Iran-aligned Houthis said they targeted Saudi oil tankers near Yanbu and in the Gulf of Aden, extending risks to the Red Sea routes used to divert crude away from the Persian Gulf. Saudi Arabia had not confirmed the attacks.

US inventory data added another bearish signal.

Commercial crude stocks rose by 2.5 million barrels to 407 million in the week ended July 31, against expectations for a decline, as imports increased and refinery utilisation eased.

Inventories nevertheless remained about 6% below their five-year seasonal average.

Oil is therefore caught between diplomatic hope and a still-fragile supply system. A credible Hormuz agreement could pull Brent towards the mid-$70s and WTI closer to $70.

Until tanker traffic, Gulf exports and Red Sea security improve together, the geopolitical premium is unlikely to disappear entirely.