Oil Prices Fall Sharply as US-Iran Pause Eases Immediate Supply Fears

Oil prices fell sharply on Monday after the United States and Iran halted attacks on each other over the weekend, easing fears of an immediate supply shock. Brent crude dropped as much as 7.4 per cent, briefly trading below 90 dollars a barrel before recovering, while West Texas Intermediate slid toward 83.50 dollars.

What drove the fall?

The trigger was restraint rather than resolution. The United States paused nearly two weeks of strikes against Iran late on Friday without an official announcement, and Tehran said it had stopped its retaliatory strikes in turn.

Markets had positioned for worsening headlines over the weekend and instead received a pause, which lowered the near-term probability of an escalation spiral.

The decline still leaves prices far above where they stood before the latest escalation. Brent remains up more than 50 per cent so far this year, reflecting accumulated supply disruption fears, shipping risk and a geopolitical premium that has not cleared.

What risks remain in the market?

The relief is conditional. Iranian-backed Houthi forces in Yemen claimed responsibility over the weekend for attacks on Saudi Aramco facilities at the Red Sea ports of Jizan and Yanbu.

That widens the exposure beyond the Strait of Hormuz to the Bab al-Mandeb corridor, meaning both of the region’s principal export routes now carry risk.

Talks between Iran and Oman over managing shipping through Hormuz are continuing, and the strait’s legal status remains unsettled. No formal ceasefire has been announced.

How much supply has been lost?

The International Energy Agency reported that global oil supply rebounded by 4.1 million barrels a day in June, to 98.8 million, as flows through Hormuz partially resumed.

Even after that recovery, world output remained roughly 9.4 million barrels a day below pre-war levels. The agency expects supply to fall by an average of 3.7 million barrels a day across 2026, a forecast explicitly conditional on hostilities de-escalating quickly. Should transit volumes improve, it projects supply expanding by 7.5 million barrels a day next year.

Refining has been squeezed alongside production. Global refinery runs rose by 1.5 million barrels a day in June but remained 6 million below the same month last year, with Middle East export refineries yet to restart and Asian plants running at reduced rates. Product margins hit four-year highs in early July.

What are forecasters expecting?

The US Energy Information Administration expects Brent to average 70 dollars a barrel in the fourth quarter, down from 103 dollars in the second, on the assumption that shut-in production returns.

J.P. Morgan Global Research forecasts Brent averaging 86 dollars in the third quarter, 80 in the fourth and 78 by year end, noting that the market has rebalanced partly through demand destruction, with China the clearest case.

For consumers, the EIA expects US petrol to average about 3.80 dollars a gallon in the third quarter, down from more than 4.20 dollars in the second. Low inventories are keeping refining margins elevated, which offsets part of the fall in crude prices at the pump.

All of these projections assume the pause holds. None of them survive a return to strikes on energy infrastructure.

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