Oil prices retreated on Wednesday as tentative signs of easing tensions between the US and Iran reduced immediate fears of a major supply shock in the Gulf, although analysts warned that constrained shipping through the Strait of Hormuz and falling crude inventories continue to keep markets on edge.
Brent crude, the benchmark for two-thirds of the world’s oil, traded near $106 a barrel in Asian trading after a volatile week driven by geopolitical tensions, while West Texas Intermediate (WTI) slipped below $103 a barrel after briefly climbing above $110 earlier this week.
The pullback followed comments by US President Donald Trump suggesting progress towards a possible agreement with Iran and a temporary suspension of US naval escort operations in the Strait of Hormuz aimed at reducing the risk of further military escalation.
Analysts said the softer geopolitical tone eased immediate safe-haven demand for the US dollar and triggered profit-taking across energy markets after crude prices surged sharply over fears of prolonged supply disruptions in one of the world’s most critical oil transit chokepoints.
However, market participants cautioned that the broader supply picture remains tight despite signs of diplomatic engagement.
“The blockade on Iranian oil exports remains, and ship traffic through the Strait is still constrained,” said Vijay Valecha, chief investment officer at Century Financial.
“This indicates there is no meaningful change in the ongoing supply disruption, and oil prices are lower mostly on positive sentiment around possible de-escalation,” he said.
About 20 per cent of global oil consumption passes through the Strait of Hormuz, making any disruption a major threat to global energy supplies and inflation.
Supporting the bullish longer-term outlook for crude, US inventory data released by the American Petroleum Institute showed crude stockpiles fell by 8.1 million barrels last week — potentially the biggest weekly draw since February if confirmed by official Energy Information Administration data later on Wednesday.
Analysts said falling inventories, constrained tanker traffic and rising insurance premiums for vessels operating in Gulf waters continue to provide a floor for oil prices despite the latest pullback.
Valecha said WTI faces immediate resistance between $104 and $106 a barrel, with a break higher potentially opening the way towards $110 again. On the downside, strong support is seen around the $98-$100 range.
The easing geopolitical tensions also weakened the US dollar, which slipped against major currencies after a recent rally fuelled by safe-haven demand.
The US Dollar Index fell about 0.4 per cent to near 98 levels during Asian trading as softer oil prices reduced fears of an inflation spike and lessened pressure on the US Federal Reserve to keep interest rates elevated for longer.
Recent US economic data also pointed to moderating economic momentum. The ISM Services PMI eased to 53.6 in April from 54 previously, indicating slower but still expanding activity in the world’s largest economy.
Investors are now closely watching upcoming US labour market data, including the ADP employment report and Friday’s closely watched non-farm payrolls figures, for clues on the Federal Reserve’s next policy direction.
Currency markets remained volatile, with the dollar briefly surging to nearly 158 yen before retreating amid speculation of possible Japanese intervention. Meanwhile, the euro held firm above $1.17 as improving market sentiment and softer dollar demand supported the single currency.
Precious metals also rebounded strongly, benefiting from declining US rate hike expectations and a weaker dollar.
Gold gained for a second consecutive session, climbing more than 2 per cent in Asian trading, while silver extended gains above 4 per cent amid renewed investor demand for hard assets.
Analysts said easing concerns about a prolonged oil-driven inflation shock have reduced expectations for additional US rate hikes this year, boosting appetite for non-yielding assets such as gold.
According to CME FedWatch data, the probability of another quarter-point US rate increase by year-end dropped sharply within 24 hours.
In the UAE, gold prices remained elevated despite the easing geopolitical tensions. Dubai retail gold prices stood at Dh560 per gram for 24-carat gold, Dh518.75 for 22-carat, Dh497.25 for 21-carat and Dh426.25 for 18-carat on Wednesday.
Market analysts said gold is likely to remain volatile in the near term as investors continue balancing geopolitical risks, oil price movements, inflation expectations and the evolving outlook for US monetary policy.
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