WTI recovers above $85.50 even as Middle East tensions ease

• Signs of reduced US-Iran tensions could weigh on crude oil prices.
• Nearly 20% below its October peak, WTI declined as expectations of a diplomatic settlement between the US and Iran strengthened.
• Iran’s insistence that US sanctions and blockades end before peace talks begin leaves considerable uncertainty.

At around $85.60 per barrel during Wednesday’s Asian session, West Texas Intermediate (WTI) oil is recovering after two consecutive days of declines. Nevertheless, indications that tensions between the US and Iran are easing could put downward pressure on crude prices.

Prospects for a diplomatic settlement received a boost from US President Donald Trump’s suggestion that further military strikes against Iran might not be needed. Congressional Democrats, meanwhile, are weighing whether to use the approaching government funding deadline to press the Trump administration to end the conflict.

Iran’s demand for relief from US sanctions and the naval blockade as a condition for peace talks continues to cloud the outlook. Despite continuing attacks on vessels in the Strait of Hormuz, Middle Eastern oil shipments have almost recovered to their prewar levels.

Almost 20% below its late-October peak, the US oil benchmark has surrendered much of its recent advance. The retreat has accompanied growing expectations of de-escalation and a continuing recovery in regional oil exports.

According to analysts at Rabobank, Brent crude oil "sank $4.60 to its lowest price since September, at $93.70/bbl on renewed hopes of world peace," following President Trump’s remarks over the weekend that it is "highly unlikely" the US will order "extensive strikes on Iran, assuming Iran signs a 'very strong agreement'." The analysts nevertheless warn that what qualifies as a "very strong agreement" could be "flexible, depending on how the Trump Administration plans to define 'winning' in the Middle East, after facing defeat in the US Midterm elections."