Oil settles down more than 3%; investors shrug off US sanctions on Iran

By Shariq Khan

NEW YORK, Aug 25 (Reuters) – Oil prices settled down more than 3% on Tuesday, at a one-week low as traders shrugged off the latest U.S. sanctions campaign against Iran, viewing economic pressure less risky for oil supplies than a military escalation.

Brent crude futures settled down $3.59, or 3.9%, at $88.58 a barrel, the lowest since August 14. U.S. West Texas Intermediate crude futures fell $2.65, or 3.1%, to settle at $82.36, the lowest since August 13.

The shift from military conflict to economic pressure in the U.S.-Israeli war with Iran has reduced some of the oil market’s anxiety, said Saxo Bank head of commodity strategy Ole Hansen, adding the U.S. sanctions announcement was not as forceful as some traders had expected. 

Treasury Secretary Scott Bessent unveiled the measures on Monday, almost six months into the war. He declined to identify countries targeted or say when penalties would take effect, adding he would give countries time to comply.

The economic pressure campaign has revived expectations of talks between the U.S. and Iran to resolve their conflict, which began when the U.S. and Israel launched military strikes on Tehran at the end of February, oil trading adviser Ritterbusch and Associates said.

There have been signals of a potential return to mediation to end the war. Iran and Oman said they had discussed a proposal on Tuesday for a “joint temporary navigational corridor” through the Strait of Hormuz and a plan to clear the strait of mines.

Still, Tuesday’s sharp decline in oil prices appears to be an overreaction by market participants, Ritterbusch and Associates said. They cautioned traders that the market could swing sharply higher if Iran unleashes military strikes on U.S. installations in the Middle East.

Iran has vowed to retaliate against the U.S. sanctions and expressed confidence that major trading partners would resist Washington’s pressure campaign. China, the largest buyer of Iranian oil, said on Tuesday its cooperation with Iran was conducted within the framework of international law and should not be interfered with.

SUPPLY DISRUPTION RISKS REMAIN

“Iran still retains the ability to respond by disrupting shipping, which continues to keep a residual premium in the oil price,” said Tim Waterer, chief market analyst at KCM. 

An oil tanker was struck on Tuesday by an unidentified projectile and disabled about nine nautical miles (16.7 km) northeast of Oman’s Ash Shishah, the United Kingdom Maritime Trade Operations said.

Just two tankers transited the Strait of Hormuz on Monday, the lowest daily tally of commodity vessels since early May, with both entering the Gulf, shipping data showed.

The conflict has heightened concerns over the strait, the waterway through which roughly one-fifth of global oil consumption passed before the Iran war began on February 28.

Supply disruptions have already prompted countries to draw down commercial and strategic oil reserves. 

(Reporting by Shariq Khan, Anushree Mukherjee, Ishaan Arora, and Jeslyn Lerh; Editing by Mark Potter, Emelia Sithole-Matarise, Nick Zieminski, Rod Nickel and David Gregorio)