Oil prices rebound as markets assess prospects for a Middle East peace deal

LONDON: Oil prices moved higher on Thursday, recovering part of the steep losses recorded a day earlier, as investors assessed whether efforts to secure a Middle East peace agreement would succeed.

Brent crude futures rose 54 cents, or 0.5%, to $101.81 a barrel, while US West Texas Intermediate gained 45 cents, or 0.5%, to $95.53 a barrel.

Both benchmarks had fallen more than 7% on Wednesday and touched their lowest levels in two weeks after optimism grew over a possible end to the Middle East war. Prices later regained some ground after US President Donald Trump said it was too soon for face-to-face talks with Tehran, while a senior Iranian lawmaker said the US proposal was more of a wish list than a reality.

"While peace negotiations are likely to continue at least until next week's US-China summit, the outlook beyond that remains uncertain," said Hiroyuki Kikukawa, chief strategist of Nissan Securities Investment, a unit of Nissan Securities.

Trump and Chinese President Xi Jinping are due to meet next week. Kikukawa said the main expectation was that oil prices would stay elevated.

Diplomacy and supply concerns remain in focus

Iran said on Wednesday it was reviewing a US peace proposal that sources said would formally end the war while leaving unresolved the key US demands that Iran suspend its nuclear programme and reopen the Strait of Hormuz.

An Iranian foreign ministry spokesperson, cited by Iran's ISNA news agency, said Tehran would communicate its response. Trump said he believed Iran wanted an agreement.

A Pakistan mediation source and another person briefed on the talks said the two sides were close to a one-page memorandum that would formally end the conflict. Axios reported that the United States expected Iranian responses on several major points within the next 48 hours, citing sources who said the parties were closer to an agreement than at any point since the war began.

"From a broader perspective, oil markets have remained stuck between diplomacy and disruption for more than two months, with investors' emotions being manipulated by headlines almost daily," said Priyanka Sachdeva, senior market analyst at Phillip Nova.

"If a formal deal eventually materialises, oil prices could witness a free fall as geopolitical premiums rapidly evaporate from the market. However, any fresh signs of attacks on oil infrastructure or escalation in the Middle East could easily trigger another parabolic spike in crude prices," she added.

Even if a peace deal is reached, oil supplies are expected to tighten further in the coming weeks because shipments from the Gulf would take time to resume and reach refiners around the world. During that period, oil companies are expected to continue drawing down storage to meet peak summer demand.

US inventories decline

US crude and fuel inventories also continued to fall last week as countries sought to offset supply disruptions linked to the Iran crisis, according to the Energy Information Administration on Wednesday.

Crude stocks dropped by 2.3 million barrels to 457.2 million barrels last week. Analysts polled by Reuters had expected a draw of 3.3 million barrels.