Oil prices dropped to a one-week low on Tuesday as traders viewed Washington’s latest sanctions threat against Iran as presenting a smaller immediate risk to global crude supplies than a renewed military escalation.
Brent crude futures fell 35 cents, or 0.38%, to $91.82 a barrel by 0810 GMT, while U.S. West Texas Intermediate crude declined 41 cents, or 0.48%, to $84.60.
Brent touched its lowest level since August 19, while WTI fell to its weakest point since August 17.
Saxo Bank head of commodity strategy Ole Hansen said the shift in the U.S.-Israeli conflict with Iran from military escalation towards greater economic pressure had reduced some of the anxiety in oil markets. He added that the latest U.S. sanctions announcement was less aggressive than traders had feared.
Iran has pledged to retaliate against the expanded U.S. sanctions campaign, which the Trump administration says is intended to cut Tehran’s economic lifeline. Iranian officials have expressed confidence that major trading partners will resist pressure from Washington.
The U.S. has warned countries to reduce their commercial ties with Iran or face the possibility of secondary sanctions. However, the Treasury Department stopped short of immediately imposing penalties.
U.S. Treasury Secretary Scott Bessent did not identify which countries could ultimately be targeted or specify when penalties might take effect, instead indicating that governments would be given time to comply with Washington’s directive.
Economic Pressure Reduces Immediate Oil Supply Fears
U.S. Defense Secretary Pete Hegseth said on Monday that Washington was not ruling out military action against Iran. However, the greater emphasis on economic measures has eased some concerns that the conflict could immediately create additional disruption to Middle Eastern oil supplies.
The change in approach has helped remove some of the geopolitical risk premium that had supported crude prices during previous periods of heightened military tension.
Nevertheless, the threat of physical disruption has not disappeared, particularly around the strategically important Strait of Hormuz.
Supply Disruption Risks Remain Around Strait of Hormuz
“Iran still retains the ability to respond by disrupting shipping, which continues to keep a residual premium in the oil price,” said Tim Waterer, chief market analyst at KCM.
Concerns over maritime security remained elevated on Tuesday after an oil tanker was hit by an unidentified projectile and disabled approximately nine nautical miles, or 16.7 kilometres, northeast of Ash Shishah in Oman, according to the United Kingdom Maritime Trade Operations.
Shipping activity through the Strait of Hormuz also remains severely constrained. Data showed that only two tankers passed through the strategically important waterway on Monday, the lowest daily number of commodity vessels since early May. Both vessels were travelling into the Gulf.
The conflict has placed renewed attention on the Strait of Hormuz, which historically handled roughly one-fifth of global oil consumption before the U.S.-Israeli war with Iran began on February 28.
Reduced traffic through the waterway has increased concerns about the availability of crude and other energy supplies, prompting some countries to draw on commercial and strategic petroleum reserves.
Russian Refinery Hit by Ukrainian Drone
Supply concerns were also reinforced by developments in Russia, where the Novoshakhtinsk oil refinery in the southern Rostov region was damaged by a Ukrainian drone overnight.
The regional governor said operations at the refinery had been suspended following the attack.
While these physical supply risks continue to provide some support for crude prices, Tuesday’s decline suggests traders currently see Washington’s increased reliance on economic pressure against Iran as less immediately disruptive to global oil flows than further military escalation.