Oil's leap above $100 strengthens Iran's negotiating position

Oil prices breached $100 a barrel this week, as the market began factoring in a sustained disruption to energy supplies following Trump's midterm remarks. Brent crude traded as high as about $109 on the previous day, while West Texas Intermediate climbed past $104, with both benchmarks headed for their largest weekly advances in months.

Iran's foreign minister and Pakistan's army chief have engaged in discussions on ways to revive diplomatic efforts and reduce tensions across all fronts. Islamabad has also been urging Tehran to restrain the Iran-backed Houthis after their attacks on Saudi Arabia.

The diplomatic drive is picking up steam before a meeting on Monday in Oman, where foreign ministers of the six-nation Gulf Cooperation Council are expected to meet with their Iranian counterpart. This would be the first high-level diplomatic gathering between Iran and the GCC since the conflict erupted, highlighting the pressing need to restore shipping flows.

The sharp climb in oil prices beyond the $100 psychological mark now gives Tehran added leverage in talks. The main sticking point remains the Strait of Hormuz, through which a major portion of global energy supplies transits. Iran and Oman are working on an interim arrangement that could allow for smoother passage through the waterway.

However, a pact between Iran and Oman alone is probably insufficient to fully reopen the strait. Tehran has emphasized that it expects the United States to satisfy several conditions before the waterway can return to normal, including lifting the blockade on Iranian ports, reinstating a waiver that allows Iran to sell oil, and granting Tehran access to some of its frozen overseas assets.

With oil prices above $100, the economic cost of maintaining the disruption at Hormuz is becoming significantly higher for the US and the global economy, as long-term yields hit new cycle highs. Iran has now gained substantial leverage to win concessions from Washington.

The market might begin to anticipate a resolution as soon as Trump reverses his midterm remarks. A pullback could follow as positioning has become quite stretched in recent weeks. Given the GCC meeting on Monday and a potential Fed rate hike on Wednesday, close attention should be paid to de-escalatory headlines and any Trump comment.