Oil Drops as Deal Buzz Builds, Even With Fresh Middle East Strikes

What moved prices

Crude slid on renewed belief that talks could halt the fighting, even as violence persisted. Brent, the global benchmark, was down as much as 5.6% and trading below $94 a barrel after an early plunge and partial rebound.

From a six month high in late October, the market has reversed sharply, with Brent logging its steepest weekly fall since April 2020 on an unadjusted basis. Yet for the year, oil is still up more than 50% as the war has disrupted Middle East flows. Futures have also become more sensitive to negative geopolitical headlines as Persian Gulf exports improved.

Diplomacy signals and on the ground risks

Confidence in a potential breakthrough increased after Democrats won the US midterms, intensifying pressure on the White House to find a de escalation path. Over the weekend, President Donald Trump told CNN it was "highly unlikely" he would authorize broad strikes against Iran, while adding that depends on Tehran agreeing to a "very strong agreement." US Secretary of State Marco Rubio, however, played down the odds of a near term breakthrough.

Prices hit new session lows Monday after unverified reports suggested meaningful progress on a deal between the sides. A Qatari official said purported details about a proposal - including nuclear terms, access to frozen Iranian funds and Yemen mediation - were false, while noting talks are ongoing.

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Hostilities continued alongside the diplomacy. Saudi Arabia's state media said a small blaze, later put out, broke out after the East West pipeline came under attack Monday in the Medina region. Over the weekend, a tanker was reportedly struck by an unknown projectile while transiting the Strait of Hormuz, according to UK Maritime Trade Operations. In Riyadh, Iran backed Houthi fighters damaged Saudi Aramco offices, prompting Saudi forces to destroy two missile launchers.

Supply picture and the week ahead

A Bloomberg survey found OPEC output last month reached 88% of prewar volumes. At the same time, Iranian production has weakened amid a US-imposed naval blockade on its exports. "President Trump continues to signal no appetite for further escalation with Iran, keeping downward pressure on crude oil prices," Ryan McKay of TD Securities, a senior commodity strategist, said. He added that constant headlines about deal talks likely cap rallies for now, while deeper losses may be limited without a concrete agreement.

Qatar is leading efforts to keep tensions from worsening, and Trump is scheduled to hold a Monday White House meeting with Qatari Prime Minister Sheikh Mohammed bin Abdulrahman Al Thani. US mediated talks are slated to begin Tuesday in Abu Dhabi, and Russia plans to send a higher level delegation than in prior rounds, a possible sign of more openness after months of stalemate. Traders are also watching the monthly market reports due from the US Energy Information Administration on Tuesday, from OPEC on Wednesday, and from the International Energy Agency on Friday.

The bottom line for your portfolio

This market is trading the headlines. Deal optimism and softer rhetoric are pushing prices down, but sporadic attacks and infrastructure hits keep the risk premium alive. Watch the Abu Dhabi talks, any readouts from the White House meeting, and this week's three agency reports for catalysts that could quickly swing energy stocks and oil exposed sectors.

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