Oil prices tumble on peace hopes, but fuel supply risks remain

Political pressure raises hopes, but an agreement remains elusive

The election outcome has strengthened expectations that Washington may seek to bring the conflict to an end. President Trump has acknowledged that Republican losses were partly linked to the war and the resulting rise in fuel prices, while signalling no immediate escalation of military strikes. With affordability concerns playing an important role in the election, lower energy prices would offer much-needed relief to US and global consumers and businesses.

However, the political consequences of the election could also complicate negotiations. While Trump may have a stronger incentive to reach an agreement, Iran may see his weakened domestic position as an opportunity to seek more favourable terms. Meanwhile, the prospect of a Democratic-controlled Congress could increase political scrutiny of the conflict without necessarily making a negotiated settlement easier to achieve.

For now, the market is trading on hopes of a breakthrough rather than concrete evidence that an agreement is close. The two sides may still be far apart on important issues, leaving the outlook highly uncertain. Without sustained positive signals from both Washington and Tehran, the recent decline could prove vulnerable to a reversal.

Crude exports recover faster than refined fuel supplies

Beyond the political developments, improving physical oil flows from the Middle East are helping to ease supply concerns. According to Morgan Stanley, preliminary estimates put last week's regional crude exports, including routes bypassing the Strait of Hormuz, at 18.4 million barrels per day, equivalent to approximately 102% of normal pre-war levels.

However, the sharp decline in crude futures stands in contrast to conditions in the physical shipping market, where significant disruptions persist. Many vessels remain out of position, some continue to sail with tracking systems switched off, and insurance premiums remain exceptionally elevated amid ongoing security concerns. Adding to the uncertainty, Iranian reports pointed to two further tanker incidents in the Strait of Hormuz, including one vessel reportedly striking a mine. While the futures market is increasingly pricing in a safer operating environment and the prospect of peace, conditions in the physical shipping market suggest that significant risks remain. This disconnect highlights the potential for renewed price volatility should the anticipated improvement in security fail to materialise.

The recovery in crude exports is significant and helps explain why prices have come under pressure. However, the picture is considerably less encouraging for refined fuels. Vortexa data indicate that regional oil product exports remain at only around 37% of normal levels, highlighting a substantial imbalance between the recovery in crude shipments and the availability of finished products.

While crude exports can recover through alternative routes and improving tanker movements, a sustained recovery in refined fuel supplies also requires regional refineries to operate reliably and secure safe passage for product shipments. Until these conditions improve, the impact of lower crude prices on diesel, jet fuel and marine fuel costs may remain limited.

Refining margins retreat, but distillates remain expensive

The latest refining-margin developments underline this divergence. Gasoline cracks have declined sharply across the US, Europe and Asia, supported by easing seasonal demand and improving supply conditions. Distillate margins have also retreated from recent peaks but remain elevated, with New York ultra-low sulphur diesel and European gasoil futures, key benchmarks for diesel and related middle-distillate fuels, both trading around USD 177 per barrel.

In the US, the ultra-low sulphur diesel crack has eased from highs near USD 120 per barrel to around USD 90, while the gasoline crack has fallen towards USD 25. Similar developments are evident in Europe and Asia, where gasoil cracks remain far above gasoline margins.

Meanwhile, the latest EIA inventory report showed US distillate stocks falling by 3.6 million barrels to below 100 million barrels for the first time since 2003, despite refinery runs remaining exceptionally strong at 16.7 million barrels per day.

These developments suggest that while the pressure on refining margins is easing, physical tightness remains a concern, particularly for distillates. A sustained decline in diesel, jet fuel and marine fuel costs is important for reducing inflationary pressures and easing the burden on transport, industry and global trade.

Brent tests key technical support as geopolitical uncertainty persists

From a technical perspective, Brent's sharp decline has brought prices back towards the rising 200-day moving average, currently at USD 93.4 per barrel, a widely followed long-term trend indicator last tested in August. The subsequent rebound suggests that technical buying or short covering may have contributed to stabilisation following the recent selloff.

However, with Brent trading below its 21-day and 50-day moving averages, the short-term technical picture remains weakened. Whether the 200-day average can provide sustained support may depend less on technical factors than on the next developments in US-Iran negotiations.

The recent decline offers meaningful relief to energy consumers and reduces the immediate threat of further energy-driven inflation. However, the outlook remains unusually binary. A credible peace agreement, accompanied by improving refined fuel exports, could support further normalisation in prices and margins. Conversely, stalled negotiations or renewed military escalation could quickly restore a substantial geopolitical risk premium.

For now, the market appears to be pricing in a more favourable outcome, but until diplomatic progress is confirmed and refined fuel supplies recover, the risk of renewed volatility remains elevated.