Brent set for 16% weekly decline as Iran diplomacy lifts hopes

By Olivia Hart

Reuters reported that Brent crude futures for January were heading for an approximately 16% weekly decline on Friday morning, the largest percentage drop since the start of the COVID-19 pandemic and the largest dollar-denominated decline in LSEG records dating to 1988.

Brent traded at $98.60 per barrel, up 31 cents. West Texas Intermediate (WTI) rose 48 cents to $91.00 per barrel. Despite that modest recovery, WTI faced a 13% weekly loss.

The selloff accelerated Wednesday, when crude prices fell approximately 8%. Democrats had secured control of both chambers of Congress. Investors interpreted the result as potentially increasing pressure on President Donald Trump to seek a negotiated resolution to the U.S.-Israeli conflict with Iran, which began in February, and restore Middle Eastern petroleum exports.

The incoming Congress will not take office until January. No comprehensive peace agreement has emerged.

Takeaway: Investors priced a possible diplomatic opening before any formal settlement or verified improvement in regional oil flows.

What changes in the Middle East supply balance?

A reduction in hostilities could improve shipping conditions through the Strait of Hormuz, which handled approximately one-fifth of global oil and liquefied natural gas (LNG) flows before the conflict.

Middle Eastern crude exports have shown signs of recovery. That trend supported expectations that global petroleum supplies could exceed demand. Spot premiums for several Middle Eastern crude benchmarks moved toward prewar levels.

Those changes suggested immediate supply pressures were easing. JPMorgan estimated global oil supplies exceeded demand by approximately 1.4 million barrels per day in October.

Takeaway: Recovering exports and easing benchmark premiums had shifted the market toward a supply surplus.

Why does shipping risk still constrain the recovery?

Renewed attacks on vessels in the Persian Gulf and Strait of Hormuz complicated expectations for a sustained market recovery. British maritime security authorities reported that attacks on oil-carrying vessels remained near record levels, while a fatal explosion aboard a petroleum products tanker showed that maritime risks remained acute.

Transportation restrictions forced some operators to rely on longer shipping routes and ship-to-ship transfers, or cargo movements between vessels. Those workarounds increased logistical complexity for oil shippers.

Takeaway: Physical attacks and routing restrictions prevent improving supply conditions from guaranteeing stable crude prices.

What does cheaper crude mean for upstream and downstream margins?

For energy investors, lower crude prices could reduce near-term revenue expectations for upstream producers that extract and sell crude. Refiners may gain feedstock cost relief, meaning lower costs for the crude they process, depending on regional balances, crude quality and refinery requirements.

Rystad Energy analyst Janiv Shah indicated that the crude market was moving toward oversupply, although differences in available crude quality and refinery requirements continued to affect regional balances.

Refined product margins, freight expenses and crude quality differentials, or price differences among crude grades, will determine how much feedstock relief reaches downstream operators.

Takeaway: Refiners may gain from cheaper crude, but freight, product margins and crude differentials will set the outcome.

What will determine the market's next move?

Market direction will depend on whether diplomatic negotiations produce measurable improvements in shipping security and export availability, rather than statements without corresponding changes in physical oil flows.

Key indicators include vessel attacks in the Persian Gulf and Strait of Hormuz, use of longer routes and ship-to-ship transfers, and movement in Middle Eastern spot premiums.

The incoming Congress does not take office until January, and no comprehensive peace agreement has emerged. Any verified change in vessel traffic or export volumes would test the market assumption that geopolitical risk is receding.

The analysis reflects publicly available information and market conditions at publication. It does not constitute investment, legal or financial advice.

Until then, improving supply fundamentals and unresolved geopolitical risks remain competing influences on crude prices.

Takeaway: Watch refinery margin transmission: how much feedstock relief reaches refiners after freight, product margins and crude-quality differentials.