Oil Prices Drop as U.S. Delays Iran Strikes, but Supply Risks Keep Markets on Edge

Oil prices moved lower at the start of the week after the United States signaled a temporary pause in military escalation with Iran, even as underlying supply risks across the Middle East remain unresolved. Brent crude fell as much as 14.5% intraday to a low near $96 per barrel before recovering to around $103, while prompt WTI futures dropped roughly $6 per barrel, trading near $91 after earlier losses. The pullback followed President Donald Trump’s decision to delay planned strikes on Iranian power plants and energy infrastructure for five days after what he described as “very good and productive” discussions aimed at de-escalation.

The shift in sentiment comes after a weekend marked by escalating threats and heightened uncertainty across the region. Just a few days earlier, President Trump warned that the U.S. would “hit and obliterate” Iranian power facilities if the Strait of Hormuz was not reopened within 48 hours. Iran responded with threats of retaliation, including potential strikes on regional power and water infrastructure and the deployment of naval mines across the Persian Gulf, raising the risk of prolonged disruptions to one of the world’s most important energy corridors.

While the delay in military action has eased immediate fears, flows through the Strait of Hormuz remain constrained. The waterway typically handles roughly 20% of global oil and LNG shipments, and current disruptions have already removed an estimated 7 to 10 million barrels per day from the market. Although limited vessel movement has resumed, particularly for select shipments such as Japanese and Indian-linked cargoes, hundreds of ships remain stalled, underscoring the fragility of global supply chains.

Governments and energy agencies are working on contingency measures. The International Energy Agency is actively consulting with countries in Europe and Asia on the potential release of additional strategic reserves if conditions worsen. In parallel, the U.S. Department of Energy is moving forward with a 45-million-barrel release from the Strategic Petroleum Reserve as part of a broader emergency supply effort. These actions are designed to stabilize markets, but officials have emphasized that stock releases alone cannot offset a prolonged disruption in Middle East flows.

Despite the recent price decline, forward-looking expectations remain elevated. Goldman Sachs analysts have raised their 2026 forecasts to $85 per barrel for Brent and $79 for WTI, reflecting expectations that disruptions in the Strait of Hormuz could persist longer than initially anticipated. Current projections assume flows remain significantly reduced for several weeks before gradually recovering, with additional pressure coming from the need to rebuild depleted inventories and reassess global spare capacity.

The broader impact is expected to extend beyond energy markets. Higher oil prices are projected to push global headline inflation higher over the next one to two months, with estimates suggesting an increase of up to 0.8 percentage points under baseline conditions, and potentially more under severe disruption scenarios. However, the effect on core inflation is expected to remain more limited.

Operational disruptions continue to compound the situation. Iraq has reduced output significantly and declared force majeure on key fields, while outages in Libya and ongoing infrastructure disruptions in Russia have further tightened global supply. Temporary adjustments, including eased sanctions on certain oil flows, are beginning to reshape trade patterns as refiners seek alternative sources.

For now, oil prices and the market are balancing two competing forces: short-term relief tied to diplomatic signals and longer-term structural risk tied to constrained supply. The five-day pause in U.S. military action may provide a window for negotiations, but with threats of further retaliation still in play and flows through the Strait of Hormuz far from normal, energy markets remain highly sensitive to every new development.