Oil falls as traders assess impact of US-Iran escalation

Oil prices retreated on Thursday after posting gains earlier in the session, driven by the escalating confrontation between the United States and Iran, as traders began assessing the actual impact of the tensions on global supply.

Tehran announced the closure of the Strait of Hormuz after the United States launched additional strikes against Iranian targets, while President Donald Trump pledged further attacks if a peace agreement is not reached.

Despite the escalation, three Iranian sources told Reuters that efforts to reach a preliminary agreement between the two countries have intensified, even as both sides continue exchanging strikes. Discussions are reportedly underway regarding a mechanism for releasing frozen Iranian funds.

Weak Chinese fuel demand also helped limit the oil rally triggered by the Iran crisis, as softer gasoline and diesel consumption, along with lower crude imports, eased pressure on global prices.

Brent crude futures fell 53 cents, or 0.6%, to $92.57 a barrel by 09:41 GMT, while US West Texas Intermediate crude declined 36 cents, or 0.4%, to $89.67 a barrel. Both benchmarks had risen by more than $2 earlier in the session.

Iran's Joint Military Command announced the closure of the Strait of Hormuz to oil tankers and commercial vessels, warning that any ship attempting to transit the waterway would come under fire.

"The latest escalation adds further uncertainty to already fragile ceasefire negotiations and increases the risk of prolonged supply disruptions that have constrained global exports of crude oil, refined fuels, and liquefied natural gas since the conflict began," said Soojin Kim, analyst at MUFG Bank.

Commercial vessels continue transiting

Despite the tensions, signs emerged that supply conditions may not be as severe as many fear.

The US military said on X on Wednesday that commercial vessels continue to transit to and from the Strait of Hormuz, adding that no US warships had come under attack in the waterway. The statement followed Iranian media reports claiming that US vessels near the strait had been targeted by missiles and drones.

Data from LSEG and Kpler also showed that three additional LNG carriers successfully departed the Strait of Hormuz bound for Asia with their tracking systems switched off, although the exact timing of their passage remains unclear.

Meanwhile, India reported an incident involving a vessel near the Omani port of Shinas, marking the third such event this week. However, officials at Indian refining companies told Reuters they had secured sufficient crude supplies to meet demand through at least August.

Abu Dhabi National Oil Company (ADNOC) and several other sellers also managed to export part of their crude shipments and offered additional cargoes for sale to buyers in Asia.

In the United States, data from the Energy Information Administration showed crude oil inventories fell by 7.2 million barrels to 426.5 million barrels in the week ended June 5, compared with analysts' expectations in a Reuters poll for a decline of around 4 million barrels.

In another sign of tightening supplies, a Reuters survey showed OPEC production in May fell to its lowest level in more than two decades after US maritime restrictions curtailed Iranian exports, while the effective closure of the Strait of Hormuz reduced shipments from several other Gulf producers.