Crude futures experienced a notable pullback today, with the main contract on the Shanghai International Energy Exchange settling 4.23% lower at 722.5 yuan per barrel. Overseas markets saw a volatile session characterized by an early spike followed by a sharp selloff. Brent briefly reclaimed the US$100 per barrel level during morning trading before quickly reversing course and losing that psychological threshold, bottoming out near US$97. Meanwhile, WTI probed lower to around US$93.6 per barrel, and the domestic SC crude benchmark dropped more than 6% intraday before paring some losses. This marks the fourth consecutive daily decline for oil prices, the longest losing streak since June. The current pullback can be broken down into a confluence of two driving forces, one rooted in physical supply dynamics and the other in shifting market expectations.

Driver One: Marginal Repair on the Physical Supply Side

The core supply shock that previously propelled prices higher — the attack on Saudi Arabia's key oil pipeline — is now expected to gradually heal, as exports that were stalled by the pipeline disruption and the suspension of operations at the Yanbu terminal begin to flow back into the market. In parallel, transit through the Strait of Hormuz continues to recover modestly. Data shows that Saudi crude exports via Hormuz have climbed back to 2.4 million barrels per day over the past six days, compared with only about 700,000 barrels per day in August, as Saudi Aramco rerouted more oil through the strait following the pipeline incident. With supply concerns easing to some degree, and actual outbound flows through the strait slowly recovering, the marginal improvement on the ground forms the fundamental basis for the price decline.

Driver Two: Rising Expectations of Geopolitical De-escalation

Multiple forces are now working to cool tensions in the region. Qatar is acting as a mediator, with Iran using that channel to put forward ceasefire conditions that include the unfreezing of assets and an end to hostilities across the Middle East front. With the US midterm elections approaching and the negotiation window narrowing, Washington also has strong incentives to push for diplomatic progress, and direct US-Iran talks are scheduled for this week. The growing expectation of de-escalation has prompted the market to give back some of the geopolitical risk premium accumulated earlier. Once prices broke below the US$100 round-number mark, technical selling was triggered, extending the downward momentum. However, it is important to remain level-headed: both drivers represent "marginal improvement" rather than "risk elimination." The pipeline repair has not been fully delivered, daily tanker transits through Hormuz remain well below pre-conflict levels, and disruptions to Red Sea shipping as well as delivery delays from Saudi Aramco have not yet been resolved. The US-Iran direct talks are more of an expectation than a done deal — if negotiations hit a snag, the premium that has been shed could rapidly return. Therefore, this decline is primarily a retracement of premium, and whether it represents a true trend reversal will hinge on the progress of the peace talks this week.

Looking ahead, oil prices are more likely to exhibit wide-range volatility at elevated levels with significantly higher volatility, rather than a one-way downward move. On the demand side, the IEA's downward revision of its 2026 global demand forecast and tighter macro policy settings are exerting pressure. On the supply side, low inventories, elevated geopolitical volatility, and OPEC+ production cuts provide a floor of support. The tug-of-war between bulls and bears remains intact. From a trading perspective, chasing shorts at current levels offers poor risk-reward. The key variables to monitor are twofold: first, the outcome of this week's direct US-Iran talks, which will be the pivotal node determining the direction of the geopolitical premium; and second, the pace of recovery in Hormuz transit flows and Saudi export volumes, which will confirm the actual degree of supply gap narrowing. One potential strategy is selling out-of-the-money call options to monetize elevated volatility. Conversely, if negotiations break down, investors should be prepared for the risk of a sharp rebound as premium is quickly repriced.

Risk Warning

Key risks include a resurgence or escalation of US-Iran conflict, or a dramatic and rapid easing of geopolitical tensions that could shift the supply outlook more abruptly than expected.