Oil prices plunged on Monday. The reduction was following an agreement between the United States and Iran to halt military strikes this weekend. That break raised new investor optimism that both parties could opt for diplomacy rather than war, which put the prospect of lasting harm to oil supplies aside.

The world’s main oil marker crude oil for delivery in December fell to $87.29 a barrel. It’s an 11.6% decrease in one day! US oil, known as West Texas Intermediate (WTI), dropped 6.5% to $84.60 a barrel.

Much of the gains of last week’s rally got wiped out with the fall. Attacks had hampered shipping throughout the Middle East, sending Brent above $100 a barrel for the first time since May.

Why oil prices dropped so fast

The move came after US Ambassador to the United Nations Mike Waltz said President Trump had opted to freeze military strikes against Iran. The aim is to allow time for diplomacy to be effective.

This was a big sign for traders that the war may not escalate further, at least not this time. However, following almost two weeks of disruptions to a significant oil trade path, markets responded to mere signs of relief.

Oil tankers are nevertheless careful. According to shipping data from Kpler, less than 10 ships moved each day across the Strait of Hormuz over the weekend. The figure remains well below normal traffic, indicating that operators are avoiding the area as risky.

The bigger picture

Experts warn the danger is not over. Yemen’s Houthis launched attacks on Saudi oil processing plants near the Red Sea. Ukraine also reported hitting Russian oil sites over the weekend.

The gatherings highlight that security of energy supply is precarious. Two shipping routes, the Strait of Hormuz and the Bab el Mandeb Strait, continue operating below normal levels.

Prices of Brent are still much higher than before the war. If diplomatic efforts fail, oil prices could jump again just as quickly as they fell.