Oil prices edged lower on Thursday, extending the drop from the previous session, as the geopolitical risk premium began to dissipate following a significant diplomatic breakthrough in the Middle East conflict.
War De-escalation Drives down Risk Premium
The primary reason for the decline was the announcement of a ceasefire agreement between Israel and the Palestinian militant group Hamas. The deal, which was subsequently ratified by Israel’s government, represents the initial phase of a peace initiative spearheaded by U.S. President Donald Trump. Under the terms of the agreement, fighting is set to cease, Israel will partially withdraw its forces from Gaza, and Hamas will release all remaining hostages in exchange for hundreds of prisoners held by Israel.
This move to de-escalate the conflict significantly reduced the fear of a wider regional conflagration that could disrupt oil supplies. Prior to the agreement, the market was increasingly anxious due to attacks on commercial vessels by the Iran-aligned Houthis in Yemen, who had been targeting ships they believed were linked to Israel in solidarity with Palestinians in Gaza. The ceasefire removes some of the immediacy of this threat, leading traders to pull back on the risk-related buying that had recently propped up prices.
Mixed Weekly Performance and Supply Factors
Despite the recent downward move, oil benchmarks closed the week with a mixed performance: Brent crude managed to post a slight gain of approximately 1% for the week. WTI crude remained relatively flat week-on-week, following steep declines in the previous week. In the middle of the week, prices had briefly climbed to a one-week high, supported by stalled progress in the Ukraine peace deal. The lack of diplomatic resolution signaled that sanctions against Russia, the world’s second-largest oil exporter, were likely to remain in place, supporting prices due to supply concerns. Furthermore, the Organization of the Petroleum Exporting Countries and allies (OPEC+) agreed to a smaller-than-expected oil output hike on Sunday, which helped to ease broader worries about an oversupply of crude in the immediate future.
U.S. Economic Uncertainty Looms
Adding downward pressure to the market is the ongoing uncertainty in the world’s largest crude consumer, the United States. Investors are worried that a prolonged U.S. government shutdown could negatively impact the American economy. A slowdown in the U.S. economy would inevitably translate into weaker oil demand, which acts as a fundamental headwind against any further price rallies.