Oil market watches Iran mediation as analysts warn talks could break down

The oil market is weighing the next stage in U.S.-Iran mediation after the U.S. midterm elections, Rigzone reported on Wednesday, citing a market analysis from Konstantinos Chrysikos, Head of Customer Relationship Management at Kudo.com.

Chrysikos said U.S. President Donald Trump’s comments on Tuesday “that he had no intention to engage in new military action against Iran, eased immediate fears of another escalation.” But he added: “However, markets could remain cautious as a deal is not agreed upon by both parties.”

“Meanwhile, mediation efforts continue, with both sides reviewing proposals to narrow their differences, but a breakthrough remains far from assured,” he said.

On the physical market, Chrysikos said Gulf supply remains plentiful. “Combined crude exports from Saudi Arabia, the UAE, Iraq and Kuwait rose by 10 percent in October to around 15.5 million barrels per day, broadly in line with levels seen before tensions escalated,” he said. He warned that security concerns continue to disrupt traffic and keep transport costs elevated.

“Looking ahead, mediation efforts remain the main driver,” Chrysikos said. “An interim memorandum paving the way for the reopening of the Strait of Hormuz would help improve conditions in the Gulf and push crude lower,” he said, adding: “A breakdown in talks or renewed military escalation would rebuild the geopolitical risk premium.”

In a market quick take posted on its website, Saxo Bank said oil prices had staged “a modest rebound following a two-day slump” as traders weighed “conflicting signals over the prospects for U.S.-Iran peace talks.”

“Adding to the uncertainty is how Trump may respond on the foreign policy front, where his executive powers remain considerable despite a resounding electoral rebuke driven by voter frustration over the cost of living and the war in Iran,” Saxo Bank said. “With his domestic agenda now facing greater congressional resistance, the risk of a more assertive stance abroad cannot be ignored, keeping geopolitical uncertainty firmly in focus,” it added.

Saxo Bank said a “massive blue wave mid-term election result” saw the Democrats take control of both the House of Representatives and the Senate.

Conflict scenarios

In a conflict update sent to Rigzone, Erik Meyersson, Chief EM Strategist at Skandinaviska Enskilda Banken AB (SEB), outlined concerns over renewed fighting between the U.S. and Iran after the midterms.

“A poor result for the Republicans may not necessarily limit Trump’s incentives for renewed conflict,” Meyersson said, outlining that this opens the door for a remaining “‘flame duck’ president [as opposed to a ‘lame duck’ president] until the 2028 elections.”

“Reports of attempted Israeli renewal of attacks post-midterms, and risks of Iranian retaliation/preemption points to a volatile last quarter of the year,” Meyersson warned, noting that the outlook for another round of fighting “looks precarious amid reports of extremely heavy munitions being discussed, and given the risk of mutually assured energy destruction.”

Meyersson said elevated crude oil prices and ongoing disruptions in downstream products “point to growing concerns over shipping security, conflict escalation risks, stockpiles, [and] global demand,” and warned that “absent a diplomatic breakthrough, the prevailing geopolitical equilibrium in the Middle East is inherently unstable.”

For the next three months, Meyersson put the probability of Iran capitulating at 0.05, the probability of negotiations at 0.35, and the probability of a prolonged conflict at 0.6.

Within his most likely scenario of a continuation in the conflict, he put the chances of a “low intense/unfinished conflict” at 0.2, the probability of “regime destabilization” at 0.05, and the chances of a “renewed conflict” at 0.35.

The projected oil price for the first of these is between $80-100 per barrel, for the second between $90-100 per barrel, and for the third between $100-150 per barrel, the update showed.

Rigzone said it had contacted the White House, the Iranian Ministry of Foreign Affairs and the Israeli Ministry of Foreign Affairs for comment on the analyses. At the time of writing, none had responded.