Oil slips on hopes for US-Iran deal

USOIL analysis

The UN General Assembly is providing an opportunity for fresh diplomatic efforts, renewing market optimism for a breakthrough, with hostilities between the two sides paused after a recent flare-up. In his address, US President Trump said a deal with Iran can be made "right after" the November 3 mid-term elections ^[1], while Special Envoy Witkoff noted "lengthy talks" with the Iranian delegation via mediators ^[2]. Meanwhile, Reuters reported that Tehran could reopen the Strait of Hormuz within seven days should the US ease military pressure and the blockade. ^[3]

President Trump has incentive to seek a diplomatic off-ramp as the conflict interferes with domestic policy priorities. Prices at the pump are a headache, with gas averaging well above $4 per gallon and diesel reaching new records ^[4]. Moreover, the cost of war mounts while depleting munition stockpiles. The US President may have dismissed such concerns but the Congressional Budget Office estimated that any additional month of conflict would cost at least $2 billion, while warning of a reduced inventory of missile interceptors that could last for "several years". ^[5]

Even though crude supply remains well below pre-war levels, it continues to find its way out of the Middle East, while a Bloomberg report that Saudi Arabia is preparing to reopen its East-West pipeline ^[6] adds to normalisation hopes. On the demand side, the IEA downgraded its 2026 outlook, now expecting an even bigger decline of 2.5 million barrels per day ^[7]. Headwinds to the global economy are mounting as central banks tighten policy to control inflation, which alongside high crude prices poses key risks for demand.

Renewed hopes for diplomatic progress that could end the conflict and help flows normalise are pushing oil prices lower. USOil drops for a sixth straight day, marking its longest losing streak in over a year. The move below the EMA200 shifts the immediate bias to the downside, leaving it vulnerable to deeper declines. However, the move looks technically stretched with the RSI moving into oversold territory. Coupled with active fundamental tailwinds, USOil could regain the initiative and push for fresh highs.

Geopolitical uncertainty has not gone away and achieving a lasting US-Iran deal is clearly very difficult, with previous diplomatic efforts unable to bear fruit. Even though President Trump spoke of the possibility of a deal, he also threatened Iran with annihilation once more. Moreover, hostilities are escalating in other parts of the Middle East, with the Houthis striking Saudi Arabia and disrupting crude supply. This led to the closure of the pivotal East-West pipeline ^[8], a critical alternative to the Strait of Hormuz. Despite hopes for its reopening, the pipeline remains offline for over ten days.

These lasting disruptions could prolong the market shortfall and delay normalisation, while dwindling inventories leave limited capacity to absorb further shocks. The US Strategic Petroleum Reserve has dropped to its lowest level since 1982 ^[9]. The IEA no longer expects the crude market to normalise this year and projects a 5.7 million barrels per day drop in supply.