Oil prices experienced a sharp decline on Monday, driven by investor optimism that tensions between the US and Iran could ease following a surprise diplomatic pivot. President Donald Trump confirmed that negotiations with Tehran will commence on Monday, after he called off a new wave of strikes against the nation.

According to FactSet data, the September West Texas Intermediate crude contract (CL.1) (CLU26) plummeted 6.9% to $78.85 per barrel, while the October Brent crude contract (BRN00) (BRNV26) fell 5.7% to $82.91 per barrel. The global benchmark is poised to close at its lowest level in three weeks.

The shift came after Trump stated that the US and Iran would hold talks on Monday afternoon, following his decision to cancel a fresh round of military action to facilitate an agreement over the Strait of Hormuz and Iran's nuclear program. "They know exactly what the strikes would have looked like, because they saw it forming," Trump told reporters aboard Air Force One on Sunday. "We are talking to them in the form of negotiations. Those talks begin tomorrow afternoon."

However, Iranian Foreign Ministry spokesman Esmaeil Baghaei contradicted this claim, telling reporters that no negotiations are currently taking place with the United States. He stated that Iran has no plans to send or receive a delegation at this time. Baghaei added that a deal with Oman regarding the Strait of Hormuz is nearing completion, but shipping through the critical waterway will not return to the operational norms that existed before the war began in February.

AJ Bell Investment Director Russ Mould commented: "The news that Washington has called off the strikes and will restart negotiations with Tehran—apparently after pressure from Gulf allies—has pushed Brent crude below $84 per barrel. But the market has been down this road before, and a more substantial drop in oil and bond yields will require more evidence that a durable resolution is achievable this time," he added.

In the bond market, the 2-year US Treasury yield (BX: TMUBMUSD02Y) slipped 2 basis points to 4.246%, while the 10-year yield (BX: TMUBMUSD10Y) fell 3 basis points to 4.680%, according to FactSet data.

Tickmill Group market strategist Patrick Munnelly wrote in a Monday note: "The market reaction is straightforward: the immediate de-escalation of military tensions reduces the probability of a near-term disruption at the Strait of Hormuz, thereby shrinking the geopolitical risk premium baked into crude prices." "That said, there remains a significant gap between restarting talks and fully reopening the Strait of Hormuz," he added. "The diplomatic process can quickly reduce tail risks, but it does not guarantee that supply will return to normal on the same timeline."