Has oil prices fallen too far as Tehran tears apart Trump’s peace-talk narrative?

Oil prices edged higher on Tuesday as traders questioned whether Monday’s sell-off had priced in a diplomatic breakthrough that may not exist.

Brent crude rose 1.3% to $84.89 a barrel, while West Texas Intermediate gained 1% to $81.11, recovering part of the previous session’s fall.

Crude tumbled after US President Donald Trump postponed strikes on Iran and said negotiations were under way.

Tehran challenged that account, saying it was not negotiating with Washington and had scheduled no meetings.

Another vessel was struck near the Strait of Hormuz, adding to doubts that supply risks were disappearing.

Oil may fall if diplomacy restores exports, but traders appear to have removed the premium before either peace or safe passage has been secured.

Tehran’s denial exposes a flaw in the peace trade

WTI dropped 6.9% to $78.85 on Monday, while Brent lost 5.7% to $82.91, after Trump cancelled fresh military action and suggested talks could reopen Hormuz.

The market treated the announcement as evidence that the probability of a supply shock had fallen sharply.

Iran’s response complicated that conclusion. Foreign Ministry spokesman Esmaeil Baghaei said no negotiations with the US were taking place and no meetings had been arranged.

Tehran said its discussions with Oman concerned commercial-vessel routes through the strait.

Nikos Tzabouras of Tradu told The Wall Street Journal that earlier negotiations had failed to deliver a comprehensive agreement and that another diplomatic setback could revive hostilities and oil’s geopolitical premium.

Hormuz leaves crude with explosive upside risk

Strait of Hormuz continues to remain the central point of tension as traffic is constrained, while a cargo vessel reported being hit by a projectile off Oman on Tuesday.

JPMorgan estimates that every month of disruption could add about $7 to $8 a barrel to Brent. A three-month disruption could lift the monthly average to roughly $114.

Goldman Sachs has outlined a scenario in which Hormuz disruption sends Brent above $120. That is not the bank’s base case: it expects prices to ease as tensions subside, with Brent averaging about $80 in the fourth quarter and $75 in 2027.

Those forecasts explain why the risks look uneven. The downside from a peace agreement may unfold as shipping and inventories normalise.

The upside from another attack, failed negotiation or renewed US strike could appear immediately.

Longer-term supply still limits the bullish case

A tactical rebound would not prove that oil has entered another lasting bull market. OPEC+ is raising production targets, UAE output is elevated and non-OPEC supply is responding to higher prices.

Anindya Banerjee, head of commodity research at Kotak Securities, told The Economic Times that the direction of his outlook was unchanged, although “the path and the timeline have shifted”.

He expects crude to cool into 2027 as supply outside the conflict zone expands and inventories rebuild once flows normalise.

That longer-term pressure matters because Monday’s decline was not driven by diplomacy alone.

OPEC+ approved a September quota increase of about 188,000 barrels a day, reinforcing expectations that more supply could eventually reach the market.

A genuine peace deal could push crude lower again. Until one exists, the market remains vulnerable to a sharp rebound whenever events contradict its fragile peace narrative.