Brent crude oil futures ended the week with their largest decline since the COVID-19 pandemic, as geopolitical tensions in the Middle East eased following the U.S. midterm elections. The shift in market sentiment came after heavy Republican losses raised expectations that the Trump administration would pursue a diplomatic resolution to the conflict with Iran. Analysts noted the reversal of a significant risk premium that had built up in September and October, despite stable Middle East oil flows and improving global supply conditions.
Macquarie energy strategist Walt Chancellor highlighted the change in market dynamics, attributing it to a renewed diplomatic push and less hawkish rhetoric from President Trump. Bloomberg reported that the U.S. and Iran are closer to a potential breakthrough, with Iran showing willingness to discuss its nuclear program. President Trump also spoke with Qatar's leader about de-escalation efforts, according to the report.
Physical oil prices suggest easing global supply conditions, with J.P. Morgan analysts indicating a return to surplus as Middle Eastern exports recover and demand weakens. Global supply exceeded demand by 1.1 million barrels per day in September and widened to 1.4 million barrels per day in October. Middle Eastern oil exports rebounded to 20.7 million barrels per day in October from a low of 9.8 million barrels per day in March. However, the recovery remains fragile due to ongoing attacks on shipping in the Strait of Hormuz and threats from Yemen's Houthi militants.
On Friday, front-month Nymex crude for December delivery rose 0.3% to $90.83 per barrel, while front-month Brent crude gained $0.03 to $98.32 per barrel. For the week, U.S. crude plunged 12.7%, its biggest one-week percentage decline since April 2020, and Brent crude sank 13.3%. U.S. natural gas futures gained 1.7% to $2.998 per MMBtu, their best settlement value since October 19, with a weekly gain of 3.4%. Energy stocks, represented by the State Street Energy Select Sector SPDR ETF (XLE), tumbled 12% this week.