Oil drops 6% in two sessions as Hormuz diplomacy rewrites the risk premium

Oil prices extended their steep decline on Wednesday as talks between Iran and Oman revived hopes that shipping through the Strait of Hormuz could begin to normalise, removing some of the supply premium that had driven Brent towards $95 only days ago.

Brent crude fell about 2.6% to $86.28 a barrel, while US West Texas Intermediate dropped 2.5% to $80.29 by late Asian trading.

Both benchmarks had already lost more than 3% on Tuesday, leaving crude down roughly 6% in two sessions as traders rapidly reassessed the risk of a prolonged disruption to Gulf exports.

Hormuz diplomacy changes the immediate oil trade

Iran and Oman are discussing an interim framework that could establish a temporary maritime corridor through Hormuz while work continues on a more permanent arrangement.

The talks include navigation management, information sharing and mine clearance, according to the Financial Times.

Iran has not agreed to an unconditional reopening and continues to link a broader settlement to US sanctions and the blockade of Iranian ports.

Even so, the prospect of more vessels moving through the strait has been enough to trigger heavy selling. Before the conflict, Hormuz carried roughly a fifth of globally traded oil and LNG.

Deutsche Bank strategist Peter Sidorov told MarketWatch that oil traders have shifted into a cautious wait-and-see stance as diplomatic activity increases and immediate conditions around the strait appear relatively stable.

That explains why Brent has fallen faster than WTI. Brent is more directly exposed to international seaborne supply and therefore carries a larger Middle East risk premium.

US sanctions proved less disruptive than feared

Oil has also retreated because Washington’s new campaign against Iran stopped short of immediately imposing secondary sanctions on major trading partners.

The Treasury targeted about 60 Iran-linked entities, individuals and vessels across oil, shipping, technology and other sectors.

But major Chinese financial institutions were not immediately penalised, reducing fears that Iranian crude exports would suddenly disappear from the market.

That distinction matters because China remains Iran’s most important crude buyer.

Market participants are increasingly interpreting Washington’s strategy as an attempt to force Tehran back towards negotiations rather than trigger another immediate military escalation.

The shift has encouraged expectations that economic pressure could ultimately help reopen Hormuz.

Physical supply is still much tighter than prices suggest

The selloff does not mean the oil market has returned to normal.

Shipping through Hormuz remains severely constrained, and several refiners are now avoiding vessels placed on an Iranian blacklist because of detention and insurance risks.

Iran has identified 45 ships that it says violated its transit rules.

The bigger squeeze may also be in refined products. Asian imports of diesel, jet fuel and other fuels remain about 21% below pre-conflict levels, while refining margins are elevated because supplies of suitable Middle Eastern crude remain disrupted.

That leaves the market vulnerable to another reversal if diplomacy stalls.