Oil prices experienced a decline of more than 5% on Monday, attributed to the cessation of strikes between the US and Iran over the weekend, which followed a fortnight of hostilities. The pause has elevated expectations that diplomatic efforts may facilitate a resolution to the conflict, potentially restoring normal shipping operations through the Strait of Hormuz. Brent crude futures experienced a decline of $4.89, representing a decrease of 5.05%, settling at $91.89, following a brief dip below the significant $90 support threshold earlier in the trading session. US West Texas Intermediate crude stood at 84.64 a barrel, down 4.67, or 5.23%. The decline follows a notable surge of 10% in crude prices observed last week. Both benchmarks have reached their lowest levels in almost a week, following a period of increases over the prior three weeks. Brent had earlier touched $100 a barrel as the conflict disrupted oil shipments through the Strait of Hormuz and spread to the Red Sea, affecting exports from Saudi Arabia, the world’s top oil exporter, to Asia through the Bab el-Mandeb strait. However, the cessation of hostilities has not yet restored shipping operations in the region to their previous state of normalcy. Over the weekend, shipping data indicated that fewer than 10 commodity vessels traversed the Strait of Hormuz each day.

Traffic through the Bab el-Mandeb strait experienced a decline on Sunday following the attack by Yemen’s Houthis on Saudi oil installations situated along the Red Sea coast. A third Chinese supertanker, however, successfully navigated through the Bab el-Mandeb strait. Over the week, reports emerged suggesting that Pakistan is exploring avenues to assist in revitalising the halted U.S.-Iran negotiations aimed at concluding their nearly five-month-old conflict, according to a report, which noted that this development follows an initiative from China. Yemen’s Iran-backed Houthi movement has declared a naval blockade against Saudi Arabia, which is a close ally of Islamabad and entered into a mutual defence treaty with Pakistan last year. Pakistan relies on financial assistance from Saudi Arabia and has issued a strong condemnation of the recent Houthi attacks targeting the kingdom. Taking a position perceived as overly sympathetic to Iran could consequently strain relations with Riyadh.

Simultaneously, Islamabad exhibits a substantial dependence on Beijing, which has extended considerable financial assistance and possesses economic stakes in a diplomatic settlement that would facilitate the reopening of crucial trade corridors throughout the Middle East. JPMorgan indicated in a note that each subsequent month of disruption to oil supplies could result in an increase of approximately $7 to $8 per barrel for Brent prices. If the disruption persists for three months, the bank anticipates that monthly average Brent prices may rise to approximately $114 per barrel. Goldman Sachs has cautioned that Brent crude may ascend to $120 a barrel should shipping through the Strait of Hormuz, the preeminent oil transit route globally, continue to face disruptions. Its base case, however, posits that tensions in the Middle East will ultimately subside. If the conflict subsides,

Goldman Sachs anticipates that Brent will average $80 a barrel in the fourth quarter and $75 in the following year. The bank indicated that the risks to those forecasts are “tilted to the upside,” referencing the potential for extended disruptions to shipping via both the Strait of Hormuz and the Red Sea. Anindya Banerjee, said geopolitical developments were once again driving crude oil prices. “Any strike on major Gulf export infrastructure could force a retest of $95-100 and beyond,” he said. Banerjee noted that the market is currently shifting its attention away from military strikes and is becoming more concerned about the diminishing chances of a diplomatic breakthrough. Tehran has established additional prerequisites for resuming negotiations, he stated, as each new occurrence delays the restoration of standard tanker operations in the Strait of Hormuz. Shipping activity through the waterway continues to be significantly lower than pre-war levels.