Oil prices rebound as Middle East peace prospects remain uncertain

Oil prices rose on Thursday, May 6, recovering from steep losses a day earlier, as investors reassessed the likelihood of a potential peace agreement in the Middle East and its implications for global supply.

Brent crude futures increased by 54 cents, or 0.5%, to $101.81 per barrel as of 0615 GMT, while U.S. West Texas Intermediate crude gained 45 cents, or 0.5%, to $95.53 per barrel, as per Reuters data.

The rebound followed a sharp sell-off on Wednesday, when both benchmarks dropped more than 7% to two-week lows amid optimism that the Middle East war could be nearing an end. Prices regained some ground, however, after Donald Trump said it was “too soon” for face-to-face talks with Iran, while a senior Iranian lawmaker described the U.S. proposal as more of a wish list than a realistic plan.

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

Trump is expected to meet Xi Jinping next week.

“The main scenario is that ⁠oil prices will remain elevated,” Kikukawa said.

Iran said on Wednesday it was reviewing a U.S. peace proposal that, according to sources, would formally end the war while leaving unresolved key U.S. demands, including that Tehran suspend its nuclear program and reopen the Strait of Hormuz.

An Iranian foreign ministry spokesperson, cited by the Iranian Students' News Agency, said Tehran would deliver its response in due course. Trump said he believed Iran was seeking an agreement.

According to a Pakistani mediation source and another individual briefed on the talks, the sides are close to agreeing on a one-page memorandum that would formally end the conflict.

U.S. outlet Axios reported that Washington expects responses from Iran on several key issues within the next 48 hours, citing sources who said this is the closest the parties have come to an agreement 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.

Despite the prospect of a peace deal, supply constraints are expected to persist in the near term. Even if an agreement is reached, it could take weeks for oil shipments from the Gulf to resume and reach global refineries, meaning companies may continue drawing down inventories to meet peak summer demand.

In the United States, crude and fuel stockpiles declined again last week as countries sought to offset supply disruptions linked to the Iran crisis, according to the Energy Information Administration.

Crude inventories fell by 2.3 million barrels to 457.2 million barrels, compared with analysts’ expectations in a Reuters poll for a larger 3.3 million-barrel draw.

By Tamilla Hasanova