Fear Fueled the Surge, Diplomacy Is Driving the Drop

Oil markets over the past two weeks have traded like a geopolitical barometer, spiking on fears, retreating on diplomacy, and ultimately settling into a volatile broad range. Markets are increasingly accepting that no one truly wants a prolonged war in the Middle East. The sharp rally that pushed Brent briefly back above the psychologically critical $100 per barrel mark was driven by escalating tensions around the Strait of Hormuz, but the subsequent pullback highlights a shift in market psychology from panic pricing to pragmatic risk assessment.

The most recent spike had been caused by the US naval blockade targeting Iranian ships, a move that effectively threatened to further disrupt almost 2 million barrels per day of Iranian exports from global supply chains. Given that roughly one-fifth of global oil and gas flows through the Strait of Hormuz, even partial disruption carries enormous systemic risk for energy markets and inflation globally. As of 11:40 am Singapore Standard time, WTI futures trade at $90.95 per barrel, down by -0.36%, while Brent futures hover at $95.02 per barrel, slightly up by +0.32%.

However, what followed has been equally telling. Despite military posturing and tanker interceptions, shipping flows through Hormuz never fully collapsed. Several sanctioned and non-Iran-linked vessels continued transiting the strait, signalling that while tensions are high, complete closure remains unlikely. This is precisely where the narrative began to shift, and where oil prices started retreating from their highs.

Markets are increasingly interpreting the current military manoeuvring not as preparation for prolonged war, but as leverage ahead of negotiations. Diplomatic engagement between Washington and Tehran remains fragile but ongoing, with expectations of renewed talks helping cool market sentiment and dragging crude prices lower for consecutive sessions. Brent has slipped back toward the mid-$90 range, while WTI has retreated toward the low $90 zone as hopes of dialogue reduce immediate supply fears.

Markets seem to have braced a new reality: Hormuz is too critical to global economic stability to remain closed for long. Any prolonged disruption would trigger widespread inflationary shocks, destabilise trade flows, and potentially push already fragile global growth into recession territory. That realisation has quietly become the strongest stabilising force behind oil prices.

From a supply-side perspective, Iranian exports remain vulnerable under blockade conditions, yet alternative flows from Gulf producers, including Saudi Arabia, Iraq, and the UAE, have continued to move through coordinated transit efforts. Meanwhile, elevated shipping insurance costs and rerouting delays continue to add logistical friction, which keeps a modest geopolitical premium embedded in prices.

Looking ahead, the trajectory of oil prices will likely hinge less on battlefield developments and more on diplomatic momentum. Markets are increasingly reacting to headlines around negotiations rather than troop deployments. Each signal of renewed dialogue has been met with price declines, suggesting that traders are systematically unwinding the “war premium” embedded into crude earlier this month. That said, volatility is far from over.

The Strait of Hormuz remains the single most important risk variable in the oil market today. Any confirmed large-scale disruption to tanker movement, even temporary, could trigger another sharp upward spike, potentially pushing Brent back toward the $105–$110 range. Conversely, meaningful diplomatic progress and assurances of uninterrupted tanker movement could pull prices back toward the $80 zone, particularly if global demand signals soften simultaneously.

For investors, this is not a market to trade on emotion; it is a market to trade on probability. The dominant theme now is not escalation, but stabilisation. A tip for investors is to watch extensively moving spread between Brent and WTI. We have seen it moving from +$18 per barrel to -$4 per barrel. Diplomatic talks prioritising smooth tanker movement through Hormuz are effectively lifting the war premium that fuelled the earlier rally. At the same time, residual geopolitical risk ensures that downside remains limited and rallies remain sharp. Ultimately, oil markets are sending a clear message: fear drove the rally, diplomacy is driving the correction, and uncertainty will drive volatility ahead.

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