Oil’s Rally Paused on Easing Middle East Tensions

Oil prices saw a significant drop on Tuesday, with both Brent and US crude oil futures falling more than $1 a barrel. This decrease is attributed to a reduced perception of imminent conflict in the Middle East. Markets had previously factored in a potential attack by Iran, leading to a price hike. However, with tensions easing, that risk premium is being removed, causing prices to decline.

The price of Brent crude oil specifically dropped by $1.16 (1.4%) to $81.16 per barrel as of Tuesday morning. US West Texas Intermediate crude followed a similar trend, falling $1.11 (1.4%) to $78.95 per barrel.

This comes after a volatile week for oil prices. Brent crude had risen over 3% on Monday, recovering from a seven-month low of $76.30 a barrel the prior week.

The overall oil market also faces other factors influencing its direction. The Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, are planning to increase production from October, potentially leading to a supply increase. However, the International Energy Agency (IEA) recently adjusted its global oil demand growth forecast downwards for 2025, citing sluggish economic activity in China.

The looming threat of a wider conflict in the Middle East remains a concern, as it could disrupt oil supplies from the region, a major producer. Additionally, markets are anticipating the release of the US consumer price index report on Wednesday, which will provide crucial data on inflation and potentially impact future oil prices.