Oil Futures Rise Again Following Yesterday's Drop Driven by Fragile Optimism Over Middle East Negotiations

(MENAFN- MENAFNEditorial)

Written by Samer Hasn, Senior Market Analyst at XS


Futures for both West Texas Intermediate and Brent crude are rising more than 1 percent today, after a sharp drop of more than 6 percent and 8 percent, respectively, in both benchmarks.
Crude prices fell amid optimism about diplomatic momentum that resurfaced after a prolonged absence, even as prices hovered near elevated peaks. This optimism, although I view it as extremely fragile, combined with technical factors to push prices down.
Meanwhile, the market appears to have downplayed the importance of US strikes on Iranian targets on Qeshm Island, as they seemed non-escalatory at a time when the market is already pricing in high risks of escalation, leaving the current reality unchanged.
I see nothing to justify this level of optimism about negotiations between the United States and Iran, which could keep downward moves in oil prices unsustainable. As we have discussed since the start of the war, unless either side makes core concessions regarding outstanding issues, whether the nuclear file, frozen Iranian assets, support for proxies, or dominance over the Strait of Hormuz, there are no prospects other than escalation. Furthermore, I view this negotiation round as an ill omen, warning of a near return to war, similar to what occurred at the start of the war late last February, after direct negotiations.
As for now, we await the conclusion of the midterm elections today amid anticipation of a series of potential scenarios once political constraints are lifted from President Donald Trump, represented by public pressure resulting from high energy prices, but at the same time within a complex political environment following Israeli parliamentary elections that produced no clear winner. The least severe scenario is the United States executing a harsh strike against Iran, followed by Trump declaring victory in this war and withdrawing from it while leaving the conflict settlement to Iran and surrounding Arab states. However, I do not believe this scenario is likely at all.
Another scenario could be maintaining the current status quo, represented by a no-war, no-peace situation. This could come in accordance with advice provided to Trump by the Treasury Secretary, the CIA Director, and the Secretary of State, which involves maintaining a state of no war and no deal, leaving economic pressure to bear fruit by creating internal turmoil leading to bringing down the Iranian regime, according to sources speaking to Axios. Yet even this scenario might not contain the crisis inside Iran, which could become more in need of an all-out war in the region to relieve internal pressure and weaken opposition narratives.
This, in turn, could involve growing aggressiveness from Iran toward the region, global crude supplies, and its infrastructure, leaving the market in a state of chronic disruption and amidst risks of renewed supply loss for an extended period. This is what we are experiencing today, as we see extremely high crude prices despite the recovery of regional crude supplies to the world.

The most severe scenario is a renewal of an all-out regional war with a broad and prolonged air campaign by the United States and Israel against Iran, which will respond along with its Houthi allies in Yemen by intensifying the targeting of infrastructure for crude and refined product production and export, as well as gas in the region. The new round of regional war could be geographically broader in light of the deteriorating Yemen and Saudi Arabia front, added to deterioration inside Iraq if pro-Iran militias support the front.
The most extreme scenario is the possibility of Trump delivering a limited nuclear strike against Iran targeting fortified facilities deep inside mountains, specifically the Pickaxe Mountain nuclear facility. This might not be a zero-probability scenario, given the rising debate around it among commentators, including Tucker Carlson, who claim to have sources saying Trump is studying this option. A nuclear strike would not by itself cause widespread disruption, but the highly hostile Iranian response would then be difficult to predict against the region.
In any case, the situation in the Middle East remains tilted toward escalation amid the absence of constructive diplomatic breakthroughs and seriousness in negotiations. The contradiction between high prices and recovered supplies justifies this narrative that keeps the likelihood of renewed supply disruption alive.
Regards

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