Oil prices closed lower on Friday, capping their largest weekly decline in years as traders positioned ahead of critical U.S.–Iran negotiations. Brent crude settled near $95 per barrel after dropping more than 12% for the week, while U.S. crude also recorded double-digit losses.

The sharp pullback reflects a rapid repricing of geopolitical risk, as markets temporarily dial back worst-case supply disruption scenarios. However, underlying fundamentals suggest the situation remains far from resolved.

Ceasefire Optimism Drives Sharp Repricing

The primary catalyst for the selloff has been the announcement of ceasefire talks between the U.S. and Iran. Signals from Donald Trump indicating progress in negotiations have eased immediate fears of further escalation.

Markets responded quickly, unwinding a significant portion of the geopolitical risk premium that had driven prices sharply higher in previous weeks.

However, this reaction appears to be driven more by expectations than by actual improvements in supply conditions, raising questions about the sustainability of the decline.

Strait of Hormuz Disruption Remains Critical

Despite the price drop, the physical oil market tells a different story. Flows through the Strait of Hormuz remain severely constrained, with shipping activity operating at less than 10% of normal levels.

This chokepoint, responsible for a substantial share of global oil transit, continues to limit supply availability. Iran’s control over the passage and proposals to impose transit fees add further uncertainty.

Until normal shipping resumes, the global oil market remains structurally tight, regardless of short-term price movements.

Supply Losses Push Market Toward Deficit

The scale of disruption is significant. Middle Eastern producers have already shut in millions of barrels per day, with estimates suggesting outages could exceed 9 million barrels daily in April.

Additional impacts from attacks on infrastructure—including reduced output in Saudi Arabia—are compounding the supply shock.

These developments are shifting the global oil balance from an expected surplus to a potential deficit, fundamentally altering market expectations for the year.

Volatility Reflects Conflicting Signals

The current oil market is being shaped by two opposing forces.

On one hand, diplomatic progress and ceasefire talks are reducing immediate risk premiums. On the other, ongoing supply disruptions and infrastructure damage continue to support higher prices.

This creates a volatile environment where prices can swing sharply based on headlines, even as underlying fundamentals remain tight.

The recent selloff may therefore represent a temporary adjustment rather than a sustained trend reversal.

Global Production and Supply Chains Under Pressure

Beyond the Middle East, broader supply dynamics are also under strain. U.S. rig counts have declined in recent weeks, signaling potential constraints on future production growth.

At the same time, logistical disruptions, infrastructure damage, and shifting trade flows are complicating global supply chains.

Even as some producers prepare for a potential reopening of shipping routes, the timeline for normalization remains uncertain.

Outlook: Market Hinges on Diplomacy vs. Reality

Looking ahead, oil prices will depend heavily on whether diplomatic efforts translate into tangible improvements in supply conditions.

A successful agreement that restores flows through the Strait of Hormuz could stabilize prices or push them lower. However, any setback in negotiations—or prolonged disruption—could quickly reverse the recent decline.

For now, the market appears to be cautiously optimistic, but still highly sensitive to geopolitical developments.