Oil prices edged modestly higher on Thursday after suffering one of their sharpest declines in months, as investors continued reacting to signs that the United States and Iran may be moving closer toward a diplomatic agreement that could eventually reopen the Strait of Hormuz and restore disrupted energy flows.

Oil Markets Attempt to Stabilize After Volatile Selloff

Brent crude traded near $106 per barrel while West Texas Intermediate hovered around $99 after Wednesday’s steep decline. The selloff followed comments from President Donald Trump stating that negotiations with Iran were in their “final stages,” fueling speculation that a ceasefire agreement and reopening of the Strait of Hormuz could materialize sooner than expected.

The sharp drop reflected how aggressively markets have priced geopolitical risk into oil since the conflict escalated earlier this year. Despite the recent decline, crude prices remain more than 40% above levels seen before the war erupted in late February.

Investors continue balancing two competing narratives: the possibility of a rapid diplomatic resolution versus the reality that physical energy markets remain heavily disrupted even if negotiations succeed.

Analysts noted that the market’s reaction reflects expectations that millions of barrels currently trapped or delayed in the Persian Gulf could eventually return to global supply chains. However, supply normalization would likely take months rather than weeks.

Physical Supply Disruptions Continue Supporting Prices

While optimism surrounding diplomacy pressured oil lower, energy strategists cautioned that physical supply shortages remain severe. Rabobank strategist Joe DeLaura noted that crude shipments from the Persian Gulf can take up to 55 days to reach final destinations, meaning global inventories would likely continue tightening even after any immediate ceasefire agreement.

Abu Dhabi National Oil Co. CEO Sultan Al Jaber also warned that the Strait of Hormuz disruption has become one of the most severe supply shocks in modern energy market history. He stated that full recovery of Middle East oil flows may not occur until well into 2027, even under an optimistic scenario.

Goldman Sachs analysts reported that global oil inventories are currently declining at a record pace as the conflict continues limiting supply availability across international markets.

At the same time, U.S. crude inventories fell by approximately 7.9 million barrels last week, reinforcing evidence that global consumers and refiners are aggressively drawing down available supply while uncertainty persists.

Hormuz Shipping Activity Shows Early Signs of Improvement

Some early indications of improving tanker traffic through the Strait of Hormuz helped reduce a portion of the geopolitical risk premium embedded in oil prices.

Three oil supertankers reportedly attempted crossings through the waterway in recent days, signaling cautious efforts to restore partial shipping activity. Iranian officials claimed that 26 ships transited the strait within the last 24 hours, although independent tracking data suggested lower actual volumes.

The Strait of Hormuz remains one of the world’s most strategically important energy chokepoints, handling a significant percentage of global crude oil and liquefied natural gas shipments.

Even limited disruptions to shipping traffic through the corridor have had substantial consequences for global energy prices, inflation expectations, and financial markets.

Negotiations Remain Fragile Despite Diplomatic Progress

Despite growing optimism, negotiations between Washington and Tehran remain highly uncertain. Iranian media reported that Tehran is reviewing the latest U.S. response to its 14-point proposal, though no formal agreement has been reached.

President Trump reiterated that while he hopes to secure a peaceful agreement, military action remains possible if negotiations fail. Iran simultaneously warned that future attacks could trigger retaliation extending beyond the Middle East region.

The conflicting rhetoric continues creating extreme volatility across oil, currency, bond, and equity markets as investors attempt to assess whether diplomacy or renewed escalation is more likely.

Looking ahead, traders will remain intensely focused on diplomatic developments, tanker traffic data, inventory reports, and any signals regarding the potential reopening timeline for the Strait of Hormuz.