Oil Drops as Progress on Cease-Fire in Gaza Shrinks Risk Premium

(Bloomberg) — Oil fell as signs of progress toward a cease-fire between Israel and Hamas reduced crude’s geopolitical risk premium.

West Texas Intermediate fell 1.5% to settle below $83 a barrel after the New York Times reported that Israel is open to a truce involving an initial release of 33 hostages, fewer than it previously sought.

Momentum toward a cease-fire has been building, with US Secretary of State Antony Blinken saying he will step up his push to secure a truce in Gaza during a visit to the region. The White House said Israel has agreed to hear out its concerns and hold off invading Rafah until meeting with the Americans.

Still, the gap between the two nearest Brent contracts was more than $1 a barrel in backwardation, a bullish indicator that signals tight near-term supply. Benchmark North Sea crudes have also seen a spate of buying in recent days.

Crude has risen this year on OPEC+ supply cuts and heightened tensions in the Middle East — the source of about a third of the world’s oil. Meanwhile, shifting expectations for US monetary policy are weighing on the demand outlook, and traders will look to a Federal Reserve meeting on Wednesday to gauge the prospects for rate cuts this year.

In another bearish sign, the premiums for diesel and heating oil over crude have fallen to the lowest level in months on concerns about oversupply.