Oil prices fell sharply on Wednesday, extending losses from the previous session as reports suggested progress in diplomatic efforts to reduce hostilities in the Middle East and restore shipping through the Strait of Hormuz.
Brent crude futures were down 2.6% at $86.30 a barrel by 04:17 ET, or 08:17 GMT, while US West Texas Intermediate futures declined 2.7% to $80.18 a barrel.
The latest move followed a drop of more than 5% on Tuesday after Russian media reported that the US and Iran were close to reaching a new ceasefire agreement.
Reports point to possible new US-Iran ceasefire
Russian state-owned news agency RIA Novosti reported that Washington and Tehran were nearing an agreement, citing Pakistani and Iranian sources.
The reported deal would include provisions for unrestricted navigation through the Strait of Hormuz and could be announced within days. Investing.com said it was unable to immediately verify the RIA report.
The report followed comments from Pakistani officials who said progress had been made in mediation efforts with Iran and that discussions had included restoring an interim ceasefire.
Pakistan has played an important role as a regional mediator during the US-Iran conflict and also helped broker a ceasefire between the two sides in June.
Iran and Oman reportedly agree temporary Hormuz route
Separately, Al Jazeera reported that a senior Iranian official said Iran and Oman had agreed to establish a temporary route through the Strait of Hormuz following diplomatic talks in Tehran.
However, the official reportedly stressed that the strait would not reopen completely until the US fulfilled commitments made under a framework ceasefire agreement signed in June.
The prospect of more commercial traffic passing through Hormuz has reduced some of the supply-risk premium built into crude prices.
Vital Knowledge analysts said, however, that with the possibility of renewed fighting always “just around the corner,” oil prices are unlikely to return fully to their pre-conflict levels.
“[A] geopolitical risk factor will be permanently embedded in the price,” they said.
Tanker traffic remains heavily restricted
Shipping through the Strait of Hormuz remains severely reduced as companies avoid exposing vessels to the risk of attack.
Preliminary Kpler data cited by CNBC showed that only five commodity ships passed through the strait on Tuesday, compared with a 10-day moving average of 15.
Before the conflict began in late February, roughly one-fifth of global oil and liquefied natural gas shipments moved through the waterway.
The Iran-Oman talks also came one day after the US imposed tougher economic sanctions on Tehran, with Washington signalling a preference for increasing financial pressure rather than relying on further military action.
With diplomatic headlines continuing to drive expectations around supply, crude prices are likely to remain highly sensitive to further developments involving Iran, Oman and the Strait of Hormuz.