Oil prices declined for a fourth consecutive day on Thursday as markets reacted to expectations that the losses US President Donald Trump's Republican Party suffered in Congressional elections this week may reduce the risk of further escalation of the US-Israeli war on Iran. Brent futures dropped 80 cents, or 0.85%, to $93.82 a barrel as of 0426 GMT, while US West Texas Intermediate crude futures fell $1.2, or 1.36%, to $86.92. These benchmarks had previously tumbled by more than 8% in the preceding session to reach their lowest levels since August 31.
Two sources close to Gulf government circles stated on Wednesday that a weakened Trump, who now faces a Democratic Congress capable of constraining his military options, has a greater incentive to seek a deal. These sources indicated that a full-scale assault on Iran now looks less likely. While a resolution could restore oil flows from the Middle East impacted by the war, analysts warned that the way forward remains uncertain.
June Goh, a senior oil analyst at Sparta Commodities, said markets are assessing the impact of the midterm elections on Donald Trump's next steps with the Iran war, pricing in a higher likelihood for the war to end. However, Goh cautioned that there will be more volatility ahead as the path to full diplomacy to end the war is still "wrought with many unknowns" while the global strategic reserves have "drawn very thin."
JPMorgan reported in a note on Wednesday that crude shipments through the Strait of Hormuz—the key waterway for most Gulf oil supplies—have recovered to close to pre-war levels, though at a higher cost. The bank stated that the resumption of Gulf supply has pushed the global oil market back into surplus after months of disruption caused by the war. JPMorgan estimated the market returned to a surplus of 1.1 million barrels per day in September, widening to 1.4 million bpd in October, nearly matching last year's average of 1.3 million bpd.
Despite the recent drop in oil prices, uncertainty remains before the Democratic-controlled Congress takes office in January. In a note on Thursday, Citi said there were concerns that with the midterms over, the White House could focus on its executive powers in foreign policy and potentially escalate conflict with Iran.
Eurasia Group noted in a note that the likelihood of a deal dropped to 10% from 20%, as Iran has held firm on its demands and Trump was unlikely to accept terms seen as a defeat. The group raised the likelihood of a continued standoff to 30% from 15%. Eurasia Group warned that escalation is likely to produce a sharper increase into a band of $110 to $125 per barrel for Brent.
Mukesh Sahdev, CEO of energy consultancy XAnalysts, stated that commercial oil inventories in major consuming countries are near their lowest in 15 years and suggested Iran could emerge from the US election outcome with greater resolve. On Wednesday, the Energy Information Administration reported that US crude, gasoline and distillate inventories all fell last week as demand hit its highest in a year.
