Crude oil futures on the Shanghai International Energy Exchange experienced a sharp decline, with the main contract dropping 5.83% to close at 505.7 yuan per barrel by the afternoon trading session. Both the United States and Iran voiced positive progress in negotiations, significantly reducing the geopolitical risk premium and weighing on oil prices.

Driver 1: Positive Progress in US-Iran Talks Reduces Oil Risk Premium

US Treasury Secretary Scott Bessent stated that an agreement concerning the Strait of Hormuz could be reached on the 4th or 5th of the month. "Even now, you can see many ships leaving the Strait of Hormuz," Bessent noted. On the same day, Iranian Foreign Ministry Spokesperson Esmaeil Baghaei said that Iran is still negotiating with Oman over the Strait of Hormuz, with talks achieving "positive progress" on both technical and political levels. The positive developments in US-Iran negotiations have significantly eased market concerns over a prolonged supply disruption, with attention now focused on whether the Strait of Hormuz will reopen. As the conflict approaches its six-month mark, the demands, stances, and red lines of both sides are becoming clearer, enhancing the controllability and predictability of the overall situation. Consequently, the geopolitical premium in crude oil is gradually receding. However, it is important to note that while short-term signals point to easing tensions, the deep-seated contradictions between the two parties are unlikely to be resolved quickly, and the risk of a reversal in the situation remains. The geopolitical premium may not be fully eliminated in the near term.

Driver 2: Medium-Term Supply and Demand Weakening, Fundamental Support Fading

From a fundamental perspective, the pressure from a loosening supply-demand balance in the medium term is becoming increasingly apparent. On the supply side, OPEC+ is steadily advancing its plan for monthly incremental production increases, with additional voluntary cuts being gradually unwound. Combined with US shale oil output remaining near historical highs and the continued ramp-up of production capacity in emerging regions like Brazil and Guyana, global crude oil supply is expanding steadily. On the demand side, the peak summer consumption season is in its latter stages. Coupled with rising expectations of a Federal Reserve interest rate hike and the associated concerns of a global economic slowdown, overseas refining margins for oil products have been declining, indicating weak end-user demand resilience. Domestic refining margins in China remain under pressure, with a slower-than-expected pace of demand recovery. While the near-term supply-demand balance remains tight, with inventories staying at low levels, the expectation of this tightness is gradually loosening. The weakening fundamental backdrop is providing diminishing support for prices.

Outlook

In the short term, the geopolitical premium still has room to be further priced out, and oil prices are likely to continue their weak and volatile trend. Close attention should be paid to whether the Strait of Hormuz resumes navigation. If navigation is restored, oil prices will face further downward pressure; conversely, the geopolitical premium may be reinstated. Currently, global commercial crude oil inventories remain at relatively low levels for this time of year, and OPEC+ retains the flexibility to adjust its output policy to support prices. The temporary easing of geopolitical tensions does not imply a fundamental resolution of the complex conflicts, and the risk of a re-escalation of conflict persists, which could trigger a sharp, short-term upward spike in oil prices. In terms of strategy, it may be prudent to wait for market sentiment to fully settle and prices to stabilize before initiating new positions. Key areas for future monitoring include inventory data and incremental changes in the geopolitical landscape.

Risk Warning

Renewed escalation of the US-Iran conflict or a significant easing of geopolitical tensions.