Oil prices rise 3% to two-week high on Iran war supply concerns
Market Reactions and Geopolitical Influences
By Scott DiSavino
NEW YORK, May 18 (Reuters) - Oil prices climbed about 3% to a two-week high in volatile trade on Monday as worries over supply disruption from the Iran war offset a report that the U.S. had agreed to waive sanctions on Iranian crude during talks.
Price Movements and Trading Activity
Brent futures for July delivery rose $2.84, or 2.6%, to settle at $112.10 a barrel, while U.S. West Texas Intermediate crude for June delivery rose $3.24, or 3.1%, to settle at $108.66.
That was the highest close for Brent since May 4 and the highest for WTI since April 7.
Volatility Ahead of Contract Expiration
Futures are often volatile ahead of contract expiration due to low volumes. With only around 55,000 contracts traded, WTI June futures, which rose over $4 a barrel and fell over $2 on Monday, will expire on Tuesday. WTI front-month volume has averaged about 359,000 contracts per day in 2026.
After the market closed, both crude benchmarks pared gains after U.S. President Donald Trump said he would hold off an attack on Iran that was scheduled for Tuesday.
Geopolitical Developments Impacting Oil Supply
Last week, both contracts jumped more than 7% as hopes dimmed for a peace deal to end the almost total closure of the Strait of Hormuz, through which about 20% of the world's oil supply passes.
Depleting Inventories and Strategic Reserves
Fatih Birol, head of the International Energy Agency, said commercial oil inventories were depleting rapidly, with only a few weeks' worth left due to the conflict and the closure of the strait to shipping.
Birol, who is participating in the Group of Seven finance leaders meeting in Paris, told reporters the release of strategic reserves had added 2.5 million barrels of oil per day to the market, but they were "not endless".
Diplomatic Efforts and Sanctions
"We feel that progress toward a diplomatic solution to the U.S./Iran war is little changed from around the middle of March when nearby WTI was about where it is now," analysts at energy advisory firm Ritterbusch and Associates said in a note.
Iran's semi-official news agency Tasnim said it was told by a source close to the negotiation team that unlike its previous texts, the Americans had accepted in the new text to waive Iran's oil sanctions during the period of talks.
Peace mediator Pakistan has shared with the United States a revised proposal from Iran to end the war in the Middle East, a Pakistani source told Reuters on Monday, warning that the sides "don't have much time" to narrow their differences.
FRAGILE CEASEFIRE
A fragile ceasefire is in place after the six weeks of war that followed U.S.-Israeli airstrikes on Iran on February 28, but talks mediated by Pakistan have stalled and Trump has said the truce is "on life support."
Economic Impact and Global Outlook
"Unless there is a breakthrough in negotiations between the U.S. and Iran that reopens the Strait of Hormuz in the next few weeks, the assumptions we have made in our 'baseline' scenario will no longer hold," analytics firm Capital Economics said.
"This would involve downgrades to gross domestic product forecasts across all major economies, modest recessions in parts of Europe, peak inflation of 5-6% year-over-year in the UK and euro zone and interest rate hikes by all of the world’s largest central banks, including the Fed (U.S. Federal Reserve)," Capital Economics said in a note.
China's Economic Slowdown and Oil Demand
In China, growth lost momentum in April, with industrial output cooling and retail sales sinking to more than three-year lows as the world's second-biggest economy wrestled with higher energy costs from the Iran war and persistently weak domestic demand.
China's April crude oil throughput fell to its lowest since August 2022, official data showed, as the Iran war curbed refinery runs in the world's second-largest oil consumer.
Sanctions Waivers and Global Oil Supply
The U.S. Treasury will extend a sanctions waiver allowing purchases of Russian seaborne oil for another 30 days to aid "energy-vulnerable" countries cut off from Gulf oil supplies.
(Reporting by Scott DiSavino in New York, Robert Harvey and Shadia Nasralla in London, Mohi Narayan in New Delhi and Florence Tan in SingaporeEditing by David Goodman, Nick Zieminski, Alexander Smith, Andrew Heavens, Rod Nickel)
