Oil markets opened the week with a sharp reversal, as crude prices retreated from recent multi-month highs and investors recalibrated expectations around geopolitical risk. The pullback reflected a sudden shift in tone around US–Iran relations, with renewed talk of diplomacy undercutting the fear premium that had built into prices during January’s escalation-heavy narrative. The move underscores how quickly oil sentiment can pivot when geopolitical assumptions change.

Crude Retreats as Diplomacy Takes Center Stage

WTI crude futures slid more than 5%, falling below $62 per barrel, as traders digested comments from Donald Trump indicating that Iran was “seriously talking” with Washington. Iranian officials separately suggested that preparations for talks were advancing, reinforcing the perception that both sides may be stepping back from confrontation. This marks a notable contrast with last month, when repeated threats of military action and retaliatory rhetoric helped propel oil sharply higher on fears of supply disruption.

Adding to the calmer backdrop, reports indicated that Iran’s Revolutionary Guards have no plans to conduct live-fire naval exercises in the Strait of Hormuz, a strategic chokepoint through which roughly a fifth of global oil supply flows. For energy markets, even symbolic restraint in that corridor can have an outsized psychological impact.

From Risk Premium to Reality Check

January’s oil rally was driven less by fundamentals and more by anxiety. Prices climbed despite ample global supply and lingering concerns about demand growth, particularly as manufacturing data in several major economies remained uneven. With the immediate threat of disruption now fading, traders have moved quickly to lock in profits, exposing how much of the recent upside was sentiment-driven rather than rooted in tightening balances.

This dynamic highlights a recurring behavioral pattern in commodity markets: geopolitical narratives can overwhelm fundamentals in the short term, but prices often snap back once the probability of worst-case scenarios declines. In this case, the mere prospect of dialogue has been enough to reverse weeks of gains.

OPEC+ Holds the Line, but Mood Shifts

Over the weekend, OPEC+ reaffirmed its decision to keep output unchanged in March, extending the final phase of its three-month production freeze. While this policy continues to provide a floor under prices, it was not enough to counterbalance the rapid erosion of geopolitical risk premiums. Markets appear to be signaling that supply discipline alone cannot sustain elevated prices if political tensions ease and demand expectations remain mixed.

Notably, crude remains lower year-on-year, underscoring that the broader structural picture is still one of relative abundance rather than scarcity.

What Comes Next for Oil Markets?

Looking ahead, volatility is likely to persist. Any breakdown in talks or renewed rhetoric could quickly re-inflate risk premiums, particularly given the Middle East’s central role in global energy flows. Conversely, tangible progress toward diplomacy would keep pressure on prices, refocusing attention on inventories, OPEC+ compliance, and the trajectory of global growth. For investors, the key risk lies in overreacting to headlines rather than assessing how durable these political shifts prove to be.