Sunsirs: Expectations of Geopolitical De-escalation Intensify; Crude Oil Prices Plunge Again on Monday

On Monday, November 9, international crude oil futures suffered a sharp decline. Growing expectations for a de-escalation in U.S.-Iran tensions led to a rapid contraction in the geopolitical risk premium. This, combined with weak spot market fundamentals and projections of ample global supply, placed significant downward pressure on oil prices. Brent crude plummeted 16% over the previous week, signaling a shift in the market’s primary focus from geopolitical disruptions to supply-demand fundamentals.

As of 14:30 New York time on November 9 (03:30 Beijing time on November 10), the NYMEX WTI crude oil futures contract for December delivery fell by $3.98—a decline of 4.38%—to settle at $86.85 per barrel. Meanwhile, ICE Brent crude futures for January delivery dropped by $5.75, or 5.85%, settling at $92.57 per barrel.

Refined petroleum products also weakened: December RBOB gasoline futures fell 12.58 cents to close at $2.6509 per gallon, while December heating oil futures declined 11.69 cents to close at $4.2148 per gallon.

Key Driver: Expectations of U.S.-Iran De-escalation Suppress Risk Premium

The primary catalyst for the current downturn in oil prices is the rising anticipation of a de-escalation in U.S.-Iran tensions. U.S. President Donald Trump indicated that if progress is made in negotiations, the U.S. would refrain from launching large-scale strikes against Iran—though he noted that all options remain on the table, and U.S. forces in the Middle East remain in a state of combat readiness. Iran has also signaled an openness to talks; its Foreign Minister and a Foreign Ministry spokesperson expressed a desire to avoid prolonged conflict, reaffirming that a previously proposed “two-day plan” remains on the table. Furthermore, they noted that the status of navigation through the Strait of Hormuz now depends on decisions made by the U.S. side.

Although isolated attacks on vessels near the Strait continue and localized conflicts have not entirely ceased, the market’s primary focus has shifted toward the prospect of peace negotiations. Consequently, long-position holders have exited the market, leading to a concentrated surge in selling pressure. Various institutions suggest that the market has begun to price in a scenario where regional conflicts de-escalate and crude oil shipping lanes remain open, leading to a rapid contraction in the “geopolitical premium.”

However, market views remain divided. EBW Group expresses caution regarding the potential outcome of negotiations, arguing that the U.S. will likely exercise further restraint only if crude oil exports from the Middle East remain stable. Geopolitical risks have not been entirely eliminated; the situation remains a matter of strategic maneuvering based on expectations.

Fundamentals: Weak Spot Market and Signs of Looser Supply

As geopolitical tensions ease, weakness in the crude oil spot market has further amplified the downward trend. Morgan Stanley points out that the shift of spot Brent crude to a discount against near-term futures is a clear indicator of a weakening spot market, reflecting that current spot supplies are not tight.

Meanwhile, there are signs of increased supply: OPEC’s production in October rose by 1.38 million barrels per day (bpd) to 22.87 million bpd, with higher output from Saudi Arabia, Kuwait, and Iraq partially offsetting the impact of production cuts.

On the demand side, earlier high oil prices have dampened consumption, causing the market to gradually shift toward a surplus. J.P. Morgan estimates a global crude oil surplus of approximately 1.4 million bpd for October.

Inventory data presents a mixed picture: market surveys anticipate a slight decline of 330,000 barrels in U.S. crude oil inventories for the week ending November 6. At the same time, the U.S. Strategic Petroleum Reserve (SPR) continues to fall, reaching 279.5 million barrels—its lowest level since October 1982. This low level of reserves provides a degree of support for oil prices, limiting the pace of any decline. UBS notes that with crude oil exports from the Middle East remaining high, the ample supply in the spot market continues to exert downward pressure on prices.

According to crude oil analysts at SunSirs, oil prices will remain focused on the progress of U.S.-Iran negotiations in the short term, with geopolitical expectations continuing to serve as the primary driver for current market activity. Should negotiations yield substantive progress, the risk premium will likely dissipate further, leaving room for oil prices to decline. Conversely, if the situation remains volatile or shipping lanes face renewed disruption, there is a risk of a rapid rebound in oil prices.

From a fundamental perspective, the global crude oil market is shifting from a state of tightness to one of surplus. Factors such as discounts on spot prices and a recovery in OPEC production point toward a looser supply environment in the medium term, exerting significant downward pressure. However, with U.S. Strategic Petroleum Reserves at historic lows—compounded by seasonal winter demand for heating oil—there is some periodic support. The medium-term outlook is characterized by a complex interplay of bullish and bearish supply-demand factors.

In summary, the crude oil market has entered a phase of high-volatility oscillation. Trading strategies should account for developments in geopolitical news, OPEC production levels, and U.S. inventory data.

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