Crude oil prices experienced a sharp decline on Monday, with Brent crude slipping below the $100 per barrel threshold for the first time since early May. The drop was fueled by growing optimism surrounding U.S.-Iran negotiations, which traders believe could lead to increased oil flows through the critical Strait of Hormuz. Brent crude futures settled at $97.53 per barrel, down $6.01 or 5.8%, while West Texas Intermediate (WTI) crude fell $5.65 to $90.95 per barrel, a 5.9% decline. Both benchmarks touched their lowest levels since May 7.
The market was also influenced by thin trading volumes due to public holidays in the United States and the United Kingdom. The New York Stock Exchange was closed for Memorial Day, and UK markets were shut for a bank holiday, leading to reduced liquidity and heightened price volatility. With fewer participants active, price swings were more pronounced than usual.
Diplomatic Progress and Market Sentiment
President Donald Trump over the weekend indicated that a framework for a deal with Iran was "largely negotiated," though both sides subsequently tempered expectations for a swift agreement. Traders are now assessing how much of the Middle East supply risk might be alleviated if talks advance. Warren Patterson, head of commodities strategy at ING, noted that the market may be "more cautious about overreacting" given that previous negotiations have collapsed. Giovanni Staunovo of UBS emphasized that the key question remains the actual "physical oil flows" through the strait.
Last week, oil prices had already posted significant losses, with Brent closing Friday at $103.54 and WTI at $96.60. Weekly declines were 5.48% for Brent and 8.37% for WTI, as headlines on U.S.-Iran talks kept shifting expectations. Phil Flynn, senior analyst at Price Futures Group, described the pace of news as "hard to keep up with."
Strait of Hormuz and Supply Dynamics
The Strait of Hormuz remains the central risk factor. Before the conflict, approximately 20% of global oil and liquefied natural gas shipments transited this chokepoint. Reports indicate that negotiations are still deadlocked on issues related to the strait, nuclear concerns, and frozen Iranian assets. Shipping data showed limited tanker movement through the strait, with two LNG tankers departing on Monday and a supertanker loaded with Iraqi crude heading to China on Saturday after idling in the Gulf for nearly three months.
India, the world's third-largest oil importer and consumer, is already adjusting its procurement strategy. Refiners are shifting purchases toward Latin American and African crude as disruptions affect Middle Eastern supplies. Russia continues to be India's top supplier, followed by the UAE and Saudi Arabia.
Market Implications and Sector Impact
The decline in crude prices provided a boost to fuel-sensitive sectors. European airlines saw gains, with Lufthansa rising 3.7% and Air France-KLM adding 7.5%. In contrast, energy stocks underperformed the broader market. The downside risk to oil prices remains significant; if negotiations falter or shipping risks escalate, prices could rebound sharply given already low inventories. The U.S. Energy Information Administration reported a record draw of 17.8 million barrels from crude stocks for the week ending May 15, including 9.9 million barrels from the Strategic Petroleum Reserve.
Traders are now looking ahead to the next EIA weekly petroleum report, scheduled for Thursday, May 28, delayed due to the Memorial Day holiday. The data will be closely watched to gauge whether U.S. oil inventories continue to decline as summer fuel demand increases. Additionally, seven OPEC+ members are set to meet on June 7 to evaluate market conditions, quotas, and compensation, after agreeing to raise June output targets. It remains uncertain whether Gulf exporters can increase production further.
