ING strategists Warren Patterson and Ewa Manthey note a sharp correction in Brent, with ICE Brent dropping 7.6% and falling back below $105/bbl as hopes for US-Iran talks grow ahead of US midterm elections. They highlight that strong signals of peace progress would imply further downside, with a sizeable risk premium still embedded given robust Persian Gulf oil flows.

Risk premium vulnerable to de-escalation

"Energy markets saw an aggressive pullback yesterday, with ICE Brent settling 7.6% lower and prices falling back below $105/bbl. The move comes amid new hopes for potential US-Iran talks. While we’ve seen this before with nothing materialising, positive signals appear to be coming from both the US and Iran."

"President Trump responded “no” to a question on whether he would strike Iran following the midterm elections. Iran’s president said that the government has been given more authority from the country’s supreme leader to negotiate with the US."

"Despite these positive signals, it’s probably too early to think escalation risks have passed. On Monday, the US carried out strikes on Iran’s Qeshm Island, reportedly in response to Iran firing at a US aircraft."

"What is clear, though, is that strong signals of progress in peace talks would mean more downside for prices. The market still has a large risk premium baked in, particularly given the strong oil flows from the Persian Gulf."

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