Oil prices fall as hopes rise for a potential diplomatic breakthrough between the United States and Iran

Oil prices fell on Monday as prospects for potential diplomatic breakthroughs in the Middle East strengthened on the eve of midterm elections that could represent a pivotal moment for the war in Iran.

Futures for Brent crude (BZ=F), the international benchmark, lost around 7.9% to trade below $105 a barrel, while those for U.S. WTI crude (CL=F) lost 7.5% to hold near $96.

Oil futures began falling on Monday after Axios reported that while Israeli Prime Minister Benjamin Netanyahu had been pressuring the White House for a series of heavy-handed strikes against Iran, President Trump said he wanted to give diplomacy with Tehran another chance.

Axios’ reporting is consistent with President Trump’s public statements in recent days, in which he said the United States would not strike Iran after the midterms. However, national media reports in recent weeks have indicated that the U.S. military briefed Trump on options for another major escalation after the midterms, when the risk of a political backlash against the president would lessen.

Learn more: How oil shocks impact your wallet, from gas to groceries

Adding to downward pressure on oil prices on Monday, Tehran leaders said contacts with the United States over negotiations to end the war were continuing, Reuters reported, as talks between Iran and Qatari mediators resulted in little more than proposed text but a decisive deal.

“The consultations through the mediators are very intensive,” Iranian Foreign Minister Abbas Araghchi said in comments to state media IRNA. “We have presented our conditions and our proposals and everything depends on the political rationality of Washington.”

The leaders of China and Russia both spoke out against a full resumption of hostilities on Monday, in comments from their foreign ministries. China is a major buyer of energy from the Gulf region and, after largely staying away from the conflict in the early months, has become more directly engaged in it in recent weeks.

In Russia, the war in Iran has worsened the national fuel shortage, caused largely by strikes on oil refineries by the Ukrainian military and international sanctions imposed on Moscow. President Vladimir Putin reportedly spoke with Iranian security chief Mohsen Rezaei on Monday, according to Reuters.

However, the diplomatic headlines have not yet tempered Wall Street’s forecasts that oil prices will remain high for longer. Goldman Sachs analysts led by Daan Struyven said on Monday they now expect the price of Brent to average $105 a barrel in December, up from a previous forecast of $90. They forecast that Brent contracts will average $88 per barrel in 2027, up from a previous forecast of $80.

If the White House were to restart strikes against Iran, the U.S. military would likely target nuclear depots buried in Iran’s Pickaxe Mountain, missile installations near the Strait of Hormuz, or broader civilian energy infrastructure such as power plants, Goldman analysts said. Such a move would likely prompt Iran to respond, which could have consequences for the Gulf region’s oil infrastructure, adding pressure to an already strained oil market.

Elevated risks of escalation, the belief that a lasting diplomatic breakthrough between the United States and Iran will be difficult to achieve quickly and historical norms showing that past oil supply shocks have lasted for years with long-term damage suggest that the oil risk premium will remain elevated for longer, analysts said.

“Although Middle East production continues to recover as expected, we raise our crude oil price forecast as substantial downside risks to supply are likely to maintain a significant risk premium in the near term,” the analysts write.

Energy analyst Jeff Currie, former global head of commodities at Goldman Sachs, said Monday that because a resumption of hostilities would have widespread impacts on the food and fertilizer supply chain, the most likely outcome is “managed instability,” which would leave markets in the same predicament for future oil deliveries.

“The compromise is a management of instability, with the Schrödinger Strait at the heart: a strait that is neither open nor closed,” Currie said. “It limits the invite barrel. It doesn’t do anything to devalue the next one.”

Follow Jake Conley on X @byjakeconley or email him at jake.conley@yahooinc.com.