U.S. and Iran Signal Peace Talks: Why Do Oil Prices Remain High?

TradingKey - According to the latest data released by GasBuddy, the average national gasoline price in the U.S. has risen above $4.50 per gallon, reaching its highest level since mid-July 2022.

However, the latest updates indicate positive signals emerging from U.S.-Iran peace talks. Iran stated on Wednesday that it is reviewing a peace proposal submitted by the U.S. side. Sources familiar with the matter revealed that the plan would officially end the ongoing conflict.

Trump responded by expressing optimism about reaching a framework agreement with Iran, describing it as "promising." He further expressed confidence in the prospects for a deal, noting that a potential agreement could involve Iran shipping its highly enriched uranium to the United States, with a possibility of both sides reaching a deal to end the conflict as early as next week.

Driven by expectations of an agreement to end the conflict, geopolitical risk premiums dissipated rapidly. The international crude oil market experienced severe volatility, with Brent crude falling as much as 11.2% intraday and WTI crude recording a decline of over 11%. Losses subsequently narrowed, with Brent crude closing at $101.27, down 7.8%, while WTI crude settled at $95.08, down more than 7%.

The partial recovery in oil prices suggests that market confidence in the disappearance of the war premium is not yet solid—while U.S.-Iran peace talks may proceed, the outcome remains unclear. This uncertainty continued to support oil prices at relatively high levels following Wednesday's decline.

Commodity analysts at ING stated: "The breakdown in negotiations between the U.S. and Iran, combined with reports that President Trump rejected Iran's proposal to reopen the Strait of Hormuz, has completely dashed market hopes for a rapid recovery in oil supply." As one of the world's most critical oil transit routes, the Strait of Hormuz's navigational status directly impacts the stability of the global oil supply chain.

Energy consultancy Ritterbusch and Associates stated that signals from the U.S. government regarding a sustained ceasefire triggered some profit-taking. However, the firm also noted that the decline carried elements of a technical correction, given that oil prices had risen sharply over the past week.

On the other hand, the outlook for both supply and demand remains bleak. As of early May, the Strait of Hormuz—a core artery for global crude oil transport—has been closed for nearly nine weeks, resulting in the most severe oil and fuel supply disruption in history. Even if the U.S. and Iran eventually reach an agreement and navigation in the Strait returns to normal, it will take weeks or even months for the market to digest the long-term impacts of this disruption. For instance, once Middle Eastern crude transport capacity is restored, it will still take time for the oil to reach refineries for processing.

Continuous supply-side contraction has also led to an accelerated drawdown of U.S. gasoline inventories, which are currently at multi-year lows. The latest EIA data shows that U.S. crude inventories also declined last week, falling by 2.3 million barrels to 457 million barrels. Gasoline inventories dropped by 2.504 million barrels to 219.8 million barrels, the lowest level for this time of year since 2014, exceeding the previously forecast decline of 2.1 million barrels.

Morgan Stanley analysts warned in a report released this week that the U.S. gasoline market is in a state of continuous tightening. At the current rate of depletion, U.S. gasoline inventories will fall below 200 million barrels by the end of August, reaching historical lows.

Although oil prices retreated in the short term due to ceasefire expectations, geopolitical risks, maritime security, and supply chain uncertainties persist, keeping the international oil market in a state of high volatility. Three core variables—the future evolution of the geopolitical situation in the Middle East, the capacity to secure navigation through the Strait of Hormuz, and the pace of depletion of global strategic and commercial crude reserves—will continue to dictate the direction of international oil prices.