Oil Prices Drop as US-Iran Talks Ease Supply Fears

Oil prices fell more than $1 a barrel on Thursday as the United States and Iran confirmed plans to hold talks, easing market fears of a military conflict that could disrupt critical Middle East supplies.

Brent crude futures dropped $1.31, or 1.89%, to trade at $68.15 per barrel by 0714 GMT. Meanwhile, U.S. West Texas Intermediate (WTI) crude prices declined $1.24, or 1.90%, to $63.90.

Diplomatic Thaw Reverses Geopolitical Risk Premium

The price drop marks a sharp reversal from Wednesday, when oil surged about 3% following a media report that the planned talks might collapse. Later, officials from both nations confirmed the meeting would proceed on Friday in Oman, though the agenda remains unsettled.

"The oil price has erased part of the geopolitical risk premium on the news of US-Iran talks," said Mukesh Sahdev, CEO of energy consultancy XAnalysts.

Deep Divisions Cloud Negotiation Outlook

Despite the agreement to meet, significant disagreements persist. Iran has indicated it is open to discussing its nuclear program with Western powers. However, the U.S. aims to include a broader range of issues, including Iran's ballistic missiles, its support for regional proxy groups, and its domestic human rights record.

The wide gap between their positions suggests that market relief could be temporary. "It is likely that these talks will surface new differences and the risk premium will rise again soon," Sahdev noted.

Strait of Hormuz: A Critical Chokepoint for Global Oil

Underlying the market's sensitivity is the continued risk of a wider confrontation. Concerns remain that U.S. President Donald Trump could act on threats to strike Iran, the fourth-largest producer within OPEC.

Such a conflict could jeopardize transit through the Strait of Hormuz, a vital chokepoint between Oman and Iran. Approximately one-fifth of the world's total oil consumption passes through this waterway. Major OPEC producers, including Saudi Arabia, the United Arab Emirates, Kuwait, and Iraq, rely on the strait to export most of their crude oil.

Broader Market Pressures and US Inventory Data

Other market factors also contributed to the downward pressure on oil. Analysts noted that strength in the U.S. dollar and volatility in precious metals weighed on commodity markets and overall risk sentiment on Thursday.

Separately, data from the Energy Information Administration on Wednesday showed that oil inventories in the United States, the world's largest oil producer and consumer, declined last week after a winter storm swept across large parts of the country.