Crude oil prices pulled back from recent highs this week as diplomatic signals between Washington and Tehran stirred hopes of a resolution to the conflict that has triggered the largest energy supply disruption in recorded history.
WTI settled around $94 per barrel while Brent hovered near the $100 level, both retreating after reports emerged that the two sides were close to a 14-point memorandum of understanding. However, analysts and traders remain broadly bullish on oil, with the structural supply deficit showing few signs of resolving quickly even if a peace deal is eventually reached.
The current price weakness reflects what markets often call a panic premium unwinding. When geopolitical risk subsides, traders reduce the fear component of the oil price. Yet the underlying supply picture remains deeply strained, meaning the floor for crude is considerably higher than it was before the conflict began. Gasoline inventories in the United States have fallen for twelve consecutive weeks, while distillate fuel stocks declined for nine weeks straight, illustrating just how aggressively the domestic supply cushion has been drawn down.
The diplomatic situation itself remains fragile and far from settled. President Trump expressed dissatisfaction with Iran’s revised peace proposal last week, stating that Tehran’s offer did not meet American conditions. A senior Iranian official subsequently appeared to rebuff the US framework entirely, sending prices sharply off their intraday lows after briefly falling more than five percent on deal optimism. Trump has also warned that Iran faces significantly escalated military strikes if a deal is not agreed, underscoring that negotiations could collapse at any point.
Adding to the uncertainty, the Strait of Hormuz remains functionally closed to normal commercial traffic. Iran’s Revolutionary Guard has been seizing vessels attempting to transit without authorisation, and insurance underwriters are refusing to cover tankers crossing the strait even during ceasefire periods. The IEA estimates the conflict is currently disrupting roughly 14 million barrels per day of global oil supply, an extraordinary figure that dwarfs previous supply shocks in scale.
Crucially, market participants are pricing in a slow production recovery even in a post-war scenario. Gulf Cooperation Council production facilities have sustained damage throughout the conflict, and restoring output to pre-war levels is expected to take months rather than weeks. This structural lag means that a peace deal, whenever it arrives, would not immediately flood markets with supply. Prediction market traders on Kalshi currently assign a greater than 50 percent probability that WTI will reach $127 per barrel at some point this year, well above the current trading range.
Inflation dynamics also complicate the broader picture. Elevated energy costs have filtered through to transport, manufacturing, and consumer goods prices across the United States and Europe. Citi equity strategist Scott Chronert noted that the longer the conflict persists, the more it shapes Federal Reserve thinking on interest rates. Higher oil prices for longer create an uncomfortable dilemma for policymakers already navigating sticky core inflation, potentially delaying rate cuts and weighing on growth expectations across equity markets.
For now, the oil market appears content to trade in a range between $95 and $105 on WTI, with directional moves determined almost entirely by diplomatic headlines out of Washington, Tehran, and Islamabad, where Pakistan is serving as a key backchannel mediator. A credible, verified peace deal with confirmed Hormuz reopening would likely send prices sharply lower in the near term. Absent that, the inventory drawdown, infrastructure damage, and lingering geopolitical risk premium should continue to provide a meaningful floor for crude through the summer months.
