Oil Prices Drop Over 3% as US Focuses on Sanctions Against Iran

Oil prices dropped more than 3% following the US decision to increase economic sanctions on Iran, signaling a reduced likelihood of renewed military conflict.

Brent crude futures fell 3.2% to $89.20 per barrel, while US West Texas Intermediate crude declined 3.3% to $82.21 per barrel. Prices have decreased over 5% this week after the US unveiled new sanctions targeting Iran and entities trading with the country.

The White House described the sanctions as an "economic D-Day." Treasury Secretary Scott Bessent stated the campaign represents the "single greatest financial offensive ever," adding that a return to large-scale war is unlikely under this strategy.

"If we are doing the maximum economic pressure, then that means that likely there will not be a large-scale kinetic restart," Bessent told CNBC last week.

The US State Department is preparing to return diplomats evacuated from the Middle East, with The New York Times reporting their return as soon as this week, indicating reduced expectations of full-scale warfare.

However, US Defense Secretary Pete Hegseth cautioned that military strikes remain an option if Iran escalates tensions.

"If we need to use kinetic strikes, we'll use them," Hegseth said. "If Iran is foolish enough to overplay their hand or mess with the American military, we'll do what we need to do." He emphasized that economic pressure currently inflicts the greatest harm on Iran but did not rule out military action in the Strait of Hormuz or surrounding areas.

Iranian Economy Minister Ali Madanizadeh responded on state television, asserting Tehran is "fully prepared" to withstand further US sanctions.

"The government is and was ready and has a two-year plan to manage these events," Madanizadeh said. "We have our own tools and we know how to play the game."

China, a major trading partner of Iran, faces potential consequences under the sanctions for continuing to buy Iranian oil. Chinese Foreign Ministry Spokesperson Lin Jian stated that Beijing will "do everything necessary to firmly safeguard its rights and interests," criticizing unilateral sanctions as lacking international legal basis.

"China has made clear on many occasions its firm opposition to illicit unilateral sanctions that have no basis in international law or the authorization of the UN Security Council," Lin said. He added that China’s cooperation with Iran operates within international law and should not be disrupted.

Analysts at BBH noted the US measures serve more as a warning than a decisive strike, highlighting China’s critical role as Iran’s largest trading partner, buying about 90% of its oil exports. Targeting China directly could provoke financial disruption and retaliation, complicating US-China relations.

Alongside oil, US natural gas futures also declined, influenced by broader energy market reactions to geopolitical developments, despite US gas supply fundamentals remaining stable.

Market anxiety eased as the US shifted from military threats to economic pressure in the ongoing Iran conflict, though risks persist due to Iran's ability to disrupt shipping in the strategically vital Strait of Hormuz.

Shipping data showed only two commodity vessels transited the Strait of Hormuz on Monday, the lowest since early May, and an oil tanker was struck and disabled near Oman by an unidentified projectile, according to the UK Maritime Trade Operations.

Meanwhile, damage to oil infrastructure occurred in Russia and Kazakhstan, with a Russian refinery hit by a drone and a fire reported at a Kazakh refinery, reflecting ongoing global energy supply risks amid geopolitical tensions.