Crude prices surged on Monday after President Donald Trump turned down Iran's latest proposal, a seven-day plan to end hostilities and reopen the Strait of Hormuz, keeping a substantial geopolitical risk premium embedded in the market even as physical oil flows from the Middle East recover.
Brent futures climbed 2.5% to $106.92 a barrel before pushing above $108 in later trading, while West Texas Intermediate advanced 2.3% to $94.49 and later reached $96.42. The rejection of Tehran's overture dashed hopes for a rapid de-escalation that had helped pull prices back from the sharpest spike of this month's Middle East supply shock.
Iran said last week that its peace proposal had been conveyed to Washington through Qatari mediators during the United Nations General Assembly. Under the plan, announced on Friday, the US would release frozen Iranian funds, lift sanctions and end its naval blockade of Iranian ports in exchange for Iran reopening the strait and returning to negotiations over its nuclear programme within a week. Trump announced on Saturday that he was rejecting the plan, though he indicated on Sunday that American negotiators were expected to hold fresh talks with Iranian counterparts this week. He has also weighed resuming airstrikes once the November midterm elections are over.
The diplomatic uncertainty comes against a backdrop of continuing attacks on Saudi energy infrastructure. The Saudi-led coalition in Yemen said it intercepted two ballistic missiles and two drones launched by Iran-backed Houthi forces toward the kingdom. Alarms were also triggered in the Abha and Jazan regions, home to Aramco energy facilities.
"While increased flows through the Strait of Hormuz have partially eased upward pressure on prices, the broader picture is that the oil market remains in a supply deficit," said Hamad Hussain, senior economist at Capital Economics.
Despite the renewed price strength, there are tangible signs that oil is moving again. Kpler data showed that crude exports from major Middle Eastern producers rebounded to about 12.8 million barrels per day in September, the highest level since the conflict began in February.
Vessel traffic through the strait is recovering far more slowly. Some 132 transits were recorded in the week to Sept. 27, up from 116 the week before, according to the maritime tracking platform MarineTraffic, against roughly 130 crossings a day before the war. About a fifth of the world's oil supply moved through Hormuz before the fighting began, and the International Energy Agency estimates that roughly four-fifths of that volume was bound for Asia.
Saudi Arabia and the United Arab Emirates have been increasing shipments, and flows through Hormuz are expected to recover further. The kingdom has also rerouted exports after damage to its East-West pipeline, contributing to the improvement in seaborne volumes.
That recovery had recently helped push Brent lower after the benchmark broke above $100. Yet the market is now back above $108, underscoring how fragile traders consider the current calm to be.
The oil market is not simply pricing today's export volumes. It is pricing the probability that those flows could be disrupted again. The market remains tight enough that renewed problems around Hormuz or regional infrastructure could quickly recreate a shortage.
Note: Factors compiled from market analysis of the current supply and geopolitical environment.
Refined products are adding another layer of pressure. European diesel margins recently hit record levels even as crude supply improved, reinforcing the disconnect between recovering oil flows and still-elevated energy prices. US diesel crack spreads are near $100 a barrel, and spot liquefied natural gas prices are hovering around $27 per million British thermal units, more than double pre-war levels.
Analysts at ANZ warned that record US diesel prices are intensifying inflation risks and fueling debate over potential export restrictions. Any curb on American diesel exports would tighten supply outside the United States, with European prices likely to react to the prospect of reduced US shipments.
Scenario Analysis Points to a Wide Range
DBS Group's chief investment office laid out three scenarios for oil prices over the coming months.
The bank also noted that as long as Saudi Arabia's pipeline operates below full capacity and flows remain subdued, physical crude prices will likely stay in a $100 to $120 range with a significant premium to Brent futures.
The futures price understates what buyers in the region actually pay. CPC Corp, Taiwan's state-owned refiner, publishes a weekly indicator crude that tracks the grades its plants run, and in the week to Sept. 25 it averaged $115.33 a barrel. The Dubai spot benchmark for Gulf crude sold into Asia was assessed at $114.18 the same day, against a Brent futures settlement of $104.32 that Friday. That gap is the physical premium the market is paying for barrels that can still leave the Gulf.
Japan, which drew more than 90% of its crude from the Middle East before the conflict, has cut that reliance sharply. Imports from the region fell to 58.9% of the total in July, the tenth straight month below the year-earlier level, and the United States has overtaken Saudi Arabia and the UAE as its largest single supplier, according to the Ministry of Economy, Trade and Industry. State and private reserves together cover about 200 days, of which roughly 95 days are held by refiners and traders, and the ministry has said the tankers covering October deliveries have already sailed, with a decision on November due later.
The refiner has frozen pump prices for the week of Sept. 28 to Oct. 4, absorbing NT$10.7 a litre (about 34 US cents) on gasoline and NT$10.9 on diesel on top of tax cuts. Its cumulative absorption since Feb. 28 has reached NT$24.02 billion, or about US$757 million, and unleaded 92-octane still retails at NT$31.2 a litre. Neither market is passing the full increase through to consumers.
The diplomatic track has moved quickly over the past four days.
The market is therefore pricing a fragile recovery, not a return to normal. More barrels are moving, but Hormuz remains vulnerable and the US-Iran conflict is unresolved.
If this week's talks produce a credible path toward fully reopening the strait, some of the risk premium could unwind. If diplomacy fails again, Brent above $108 may reflect a market preparing for a longer period of tight supply and persistent geopolitical disruption.