Oil prices have fallen more than 19% since the end of last week as growing expectations of a potential US-Iran peace agreement trigger a sharp reversal in energy markets, with government bonds rallying as inflation concerns ease, according to a report by the Financial Times.
Brent crude dropped 8.7% on Wednesday before falling further to $94.23 a barrel in early Thursday trading, its lowest level in two months. West Texas Intermediate declined 8.3% on Wednesday and was trading at $87.15 on Thursday morning, leaving the US benchmark almost 15% lower for the week.
The selloff followed a decisive Democratic victory in the US midterm elections, increasing political pressure on President Donald Trump to end the conflict with Iran. Vice-President JD Vance attributed the Republican defeat partly to public opposition to the war, while recent statements from the administration have suggested a more conciliatory approach towards Tehran.
Seb Barker, chief market strategist at hedge fund Marshall Wace, said the election outcome suggested Congress and senior administration officials could increasingly constrain US military action against Iran. Analysts believe the shifting political environment has strengthened expectations of a negotiated settlement, although significant uncertainty remains over the timing and terms of any agreement.
The sharp decline in energy prices also triggered a rally in government bonds, with UK 10-year gilt yields falling 13 basis points to 5.16%, their largest daily decline since May. French 10-year yields dropped 16 basis points to 4.78%, as investors reassessed inflation and interest rate expectations following months of energy-driven price pressures.
The rapid reversal highlights the volatility facing commodity and global macro hedge funds as geopolitical developments drive large moves across oil, currencies and sovereign debt. Analysts warn that Brent could return above $100 a barrel if negotiations fail, with continued shipping disruptions and elevated transport costs limiting the recovery in Gulf oil supplies.
