Oil Prices Recover After Early Decline as Middle East Risks Offset Peace Hopes

Global oil prices recovered on Thursday after falling by more than $1 per barrel during early trading, as persistent tensions in the Middle East limited the impact of diplomatic progress involving Iran and Ukraine.

Brent crude futures initially dropped by $1.14, or 1.2 per cent, to $91.62 per barrel, while US West Texas Intermediate crude declined by $1.04, or 1.2 per cent, to $85.49.

However, the market subsequently reversed direction. By 0732 GMT, Brent had risen 0.49 per cent to $93.21 per barrel, while WTI gained 0.31 per cent to $86.80.

The recovery showed that investors remained cautious about treating the latest diplomatic developments as evidence that global oil supply risks were easing.

The market is responding to two competing forces: expectations that negotiations could reduce geopolitical tensions and concerns that unresolved conflicts could continue disrupting crude production and transportation.

Peace negotiations put pressure on crude prices

The initial decline followed developments in diplomatic efforts to end the conflicts involving Iran and Russia’s war against Ukraine.

Russian and Ukrainian negotiators agreed to a major prisoner exchange after two days of discussions in Abu Dhabi. However, significant disagreements remained, particularly over territorial issues, leaving uncertainty about the possibility of a broader settlement.

In the Middle East, investors were also assessing prospects for negotiations between Washington and Tehran.

Hopes that the conflict involving Iran might not escalate further reduced some of the geopolitical risk premium that had supported oil prices.

However, Iran’s position on its nuclear programme continued to complicate the diplomatic outlook.

Iranian security chief Mohsen Rezaei said Tehran would not allow enriched nuclear material to leave the country and warned that there would be consequences if the United States launched further strikes.

Washington has maintained that nuclear issues must form part of initial negotiations aimed at ending the conflict.

The disagreement leaves an important obstacle to a settlement and keeps uncertainty surrounding regional oil supplies firmly in the market.

Supply growth adds to pressure on prices

Beyond diplomacy, rising production and higher inventories are creating additional pressure on crude prices.

OPEC+ production increased in October, driven largely by higher Saudi Arabian output, despite continuing disruptions to shipments through the Strait of Hormuz.

The increase has strengthened concerns that global supply could become more abundant if production continues rising while demand remains insufficient to absorb additional volumes.

US crude inventories also increased by approximately nine million barrels during the latest week, according to preliminary figures from the American Petroleum Institute cited in the market report.

The increase added to expectations that supplies in the world’s largest oil-consuming economy may be building.

However, the inventory figure was based on industry data, with the official US Energy Information Administration report still expected later on Thursday. The two sets of figures should not be treated as interchangeable.

The combination of higher production and rising inventories has made the market more sensitive to developments that could weaken expectations for future demand or reduce concerns about supply shortages.

Why the Strait of Hormuz remains important

Despite the pressure from rising supply, the Strait of Hormuz remains a major source of uncertainty for international energy markets.

The waterway connects the Persian Gulf with the Gulf of Oman and is one of the world’s most important routes for transporting crude oil and petroleum products.

Any serious disruption to shipping through the passage could affect the movement of supplies from major Middle Eastern producers and increase transportation costs.

Although diplomatic progress could reduce the likelihood of further escalation, the unresolved tensions mean traders cannot confidently remove the geopolitical risk premium from oil prices.

This helps explain why crude prices recovered after their early losses. Investors were weighing the possibility of improved diplomatic relations against the continuing threat of disruptions to production and exports.

What the price movement means for Nigeria

For Nigeria, the decline and subsequent recovery are important because crude oil remains a major source of government revenue and foreign-exchange earnings.

The Federal Government’s 2026 budget uses a crude oil price benchmark of $64.85 per barrel and assumes production of 1.84 million barrels per day.

At $93.21 per barrel, Brent was still approximately $28.36 above the budget price assumption, providing a potentially favourable pricing environment for the country.

However, a higher international benchmark does not automatically translate into additional government revenue.

Nigeria must produce and export sufficient volumes, receive payment for its crude and ensure that proceeds due to the Federation are properly collected. Production shortfalls, operational disruptions, export constraints and changes in the prices of individual crude grades can reduce the benefits of stronger international prices.

The country’s production target therefore remains important. If output falls below the budget assumption, higher prices may not fully compensate for the volume of crude that the country fails to produce and sell.

The latest movement also demonstrates why Nigeria cannot base its revenue expectations on temporary price increases driven by geopolitical tensions.

Oil market outlook remains uncertain

The direction of crude prices will depend on whether diplomatic negotiations produce meaningful progress, how quickly Middle Eastern production and shipping conditions stabilise, and whether higher output translates into a sustained increase in available supply.

A reduction in geopolitical tensions could weaken the risk premium supporting prices, while renewed attacks or disruptions around major oil infrastructure and shipping routes could push prices higher again.

For oil-importing countries, lower crude prices could eventually reduce the cost of imported energy, although the effect on domestic fuel prices depends on exchange rates, refining costs, taxes and distribution expenses.

For exporters such as Nigeria, the immediate priority is to strengthen production and revenue collection so that the country can benefit when prices remain favourable.

Thursday’s trading therefore offered no clear indication that oil markets have entered a sustained downward trend. Instead, the recovery after early losses showed that diplomatic optimism is competing with supply concerns and geopolitical risks that remain unresolved.