Oil prices fell six per cent on Wednesday after US President Donald Trump said that negotiations with Iran were in the final stages, though investors remain wary about the outcome of peace talks as disruption to Middle Eastern supply continues.
Brent crude futures fell $6.64, or 5.97 per cent, to $104.64 a barrel by 13:45 EDT (17:45 GMT) and US West Texas Intermediate futures were down $6.49, or 6.23 per cent, at $97.66.
Trump said that negotiations with Iran were in the final stages but warned of further attacks unless Iran agrees to a deal. Iranian foreign ministry spokesperson Esmaeil Baghaei said Iran was ready to develop protocols for safe shipping traffic in co-operation with other coastal states, without providing further details.
Despite signs of progress, some market participants and analysts remain wary about the outcome of negotiations and global supply tightness that will likely persist even if the US and Iran reach a deal.
"You've got to take all these pronouncements with a grain of salt these days, but the market was also quick to reward it and price in the hope of a resolution," said John Kilduff, partner at Again Capital.
Analysts at Citi said on Tuesday that they expect Brent crude to rise to $120 a barrel in the near term, stating that oil markets are underpricing the risk of prolonged supply disruption, and Wood Mackenzie estimated that it could approach $200 if the Strait of Hormuz stays largely shut until the end of the year.
Similarly, PVM analysts said global oil stocks could reach critically low levels. "Yet, as observed lately, market players are comparatively nonchalant (or complacent) about what the conflict might bring," PVM said.
The premium on Brent contracts for delivery next month over contracts for delivery in six months - an indicator of traders' views of current supply tightness - is around $20 a barrel, way below last month's highs above $35.
Russian Deputy Prime Minister Alexander Novak said on Wednesday that some countries were lifting sanctions on Russian oil because global markets cannot function without it, the state TASS news agency reported.
Three supertankers were crossing the Strait of Hormuz on Wednesday, carrying oil bound for Asian markets, after waiting in the Persian Gulf for more than two months with six million barrels of Middle East crude on board.
The number of vessels crossing the strait remains well below the 130 or so ships that crossed daily before the war.
UAE ADNOC Chief Executive Sultan Al Jaber said on Wednesday it will take at least four months to get back to 80 per cent of pre-conflict flows.
To make up the supply shortfall, countries are relying on commercial and strategic inventories. US crude stockpiles fell last week as demand remained elevated, the Energy Information Administration said on Wednesday.
Crude inventories fell by 7.9 million barrels to 445 million barrels in the week ended May 15, the EIA said, compared with analysts' expectations in a Reuters poll for a 2.9 million-barrel draw.
(Reporting by Nicole Jao in New York Additional reporting by Shadia Nasralla and Stephanie Kelly in London, Yuka Obayashi and Jeslyn Lerh in Singapore Editing by Nick Zieminski, Kirsten Donovan)