Oil falls to more than one-week low as hopes for US-Iran breakthrough ease supply fears

Oil prices extended their sharp decline on Tuesday, falling to their lowest levels in more than a week as investors unwound the geopolitical risk premium that had built up during the recent conflict involving the United States and Iran.

As of approximately 12:07 PM GMT time, Brent crude futures traded near $86.68 per barrel, down $1.68, or 1.90%, while U.S. West Texas Intermediate crude fell to $81.33 per barrel, losing $1.28, or 1.55%.

The declines followed Monday's heavy losses, leaving both benchmarks well below the highs reached during last week's surge above $100 per barrel, when fears of severe supply disruptions dominated global energy markets.

Diplomacy replaces fear

The biggest catalyst behind Tuesday's decline was growing optimism that the United States and Iran could move toward a diplomatic solution instead of renewed military escalation.

President Donald Trump said Washington was holding "good talks" with Iran and suggested there was a chance of reaching an agreement, although he warned military strikes could resume if negotiations failed.

At the same time, reports indicated that Oman has secured backing from several Gulf states for a proposal that would allow Iran to collect voluntary transit fees through the Strait of Hormuz, offering a potential path toward restoring normal shipping through one of the world's most important oil corridors.

The prospect of improving diplomatic relations encouraged traders to reduce the sizable geopolitical premium that had been embedded in crude prices over the past two weeks.

Supply concerns begin to ease

Although shipping activity through the Strait of Hormuz remains below normal levels, investors are becoming increasingly confident that a complete shutdown of the route is becoming less likely.

The Strait carries roughly one-fifth of global oil consumption, making any disruption one of the largest risks facing the energy market.

Even so, traders are beginning to focus on the possibility that crude exports could gradually normalize if negotiations continue to make progress.

That shift in sentiment has outweighed the fact that security risks remain elevated across the Middle East.

 Risks have not disappeared

Despite the sharp decline in oil prices, geopolitical tensions have not been fully resolved.

Shipping through the Red Sea continues to face security threats, while attacks linked to Iran-backed groups remain a concern for regional energy infrastructure.

Saudi Arabia also confirmed that its Jazan refinery was shut down following a recent drone attack, highlighting that supply risks have not disappeared entirely.

However, investors currently believe these threats are less likely to produce the widespread supply disruptions that markets feared only days ago.

What comes next?

Oil traders will continue to monitor diplomatic developments between Washington and Tehran, as any setback in negotiations could quickly reverse the recent decline.

At the same time, attention will also turn toward upcoming U.S. inventory data and the Federal Reserve's policy decision, both of which could influence expectations for economic growth and future oil demand.

For now, the market is sending a clear message: investors believe the probability of a major supply disruption has declined, and they are rapidly removing the geopolitical premium that pushed crude prices above $100 only last week.