Oil Drops as Traders Weigh Outlook for Iran Nuclear Agreement

Oil fell as investors weighed the odds of a nuclear deal between the US and Iran, with more negotiations on the issue expected later this week as American forces mass in the Middle East.

Brent dipped toward $71 a barrel after closing little changed on Friday, even after US President Donald Trump said he was considering a limited military strike on Iran. West Texas Intermediate also declined on Monday.

Iranian Foreign Minister Abbas Araghchi told CBS’ Face the Nation on Sunday that there is a “good chance to have a diplomatic solution which is based on a win-win game and a solution is at our reach.” He said he expected to meet US special envoy Steve Witkoff for talks, which will be in Geneva.

Oil has rallied at the start of the year, despite broad expectations for a global glut, as concerns around a US conflict with Iran helped to drive prices higher. Traders have raced to cover themselves against the prospect of a flare-up, prompting a surge of activity across futures and options markets.

“Markets can tolerate headlines but won’t ignore lost supply,” said Haris Khurshid, chief investment officer at Karobaar Capital LP. “If exports out of Iran are hit or there’s credible interference in the Strait of Hormuz — highly likely if things go south — that’s when crude reprices fast.”

Hormuz is a narrow passage separating Iran and the Arabian Peninsula, and tankers carrying crude and liquefied natural gas transit through the waterway daily to deliver cargoes worldwide. Tehran would only need to disrupt flows, rather than fully blockade the strait, to impact global oil markets.

Saudi Arabia, Iraq and Kuwait all ship oil through Hormuz, with the majority of their cargoes heading to Asia. Iran pumps more than 3 million barrels a day of crude, or about 3% of global output, and most flows to China.

Despite concerns about escalating hostilities in the Middle East, the prompt spread for Brent — the difference between its first two contracts — has narrowed in a bullish backwardation structure. The widely watched metric was 41 cents a barrel on Monday, compared with more than $1 at the end of January.

“Watch time spreads, watch diesel/gasoil inventories and OPEC discipline,” Karobaar Capital’s Khurshid said. “If product markets tighten or the curve moves into stronger backwardation, that tells you it’s real.”

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