Oil Prices Dip as Ceasefire Hopes in Iran Fade

Oil prices declined on Wednesday, ending a three-day rally as investors focused on the fragile ceasefire situation in the Middle East.

At 08:09 GMT, Brent crude futures fell 86 cents, or 0.8%, to $106.91 per barrel. U.S. West Texas Intermediate (WTI) crude futures dropped $1.04, or 1%, to $101.14 per barrel.

Since the U.S.-Israel coalition launched a war against Iran in late February, leading to Iran's effective blockade of the Strait of Hormuz, both major oil benchmarks have largely held above the $100 per barrel threshold.

Priyanka Sachdeva, a senior market analyst at Phillip Nova, noted, "While traders find it difficult to pinpoint the direction of oil prices, concerns over supply disruptions and uncertainty in the Middle East are providing strong support."

"The market is highly sensitive to every piece of news from the region, suggesting that price volatility is likely to persist. Should the conflict escalate further or supply channels face direct threats, Brent and WTI prices could swiftly regain strong upward momentum."

On Tuesday, hopes for a lasting ceasefire between the U.S. and Iran faded, pushing oil prices up more than 3% and extending previous gains. The Strait of Hormuz handles about one-fifth of the world's crude oil and liquefied natural gas shipments, and the dimming prospects for a ceasefire have clouded hopes for the strait's reopening.

On Tuesday, former U.S. President Donald Trump stated that he believed the war with Iran could be ended, even as hopes for a lasting peace agreement waned and Iran tightened its control over the strait.

The Eurasia Group said in a client report, "The prolonged duration of supply disruptions and the scale of losses (exceeding 1 billion barrels) suggest that oil prices are likely to remain above $80 per barrel for the rest of the year."

The war in Iran has begun to impact the U.S. economy, with rising oil prices pushing up fuel costs. Economists expect ripple effects to emerge in the coming months.

In April, the U.S. Consumer Price Index rose significantly for the second consecutive month, recording the largest annual inflation increase in nearly three years. This has reinforced market expectations that the Federal Reserve will keep interest rates unchanged.

Higher interest rates can increase borrowing costs, potentially dampening oil demand.

Citing data from the American Petroleum Institute, market sources indicated that amid the ongoing war in Iran, U.S. crude inventories fell for the fourth consecutive week last week, with distillate stocks also declining. The U.S. government is set to release inventory data later on Wednesday.