Oil prices suffered a dramatic selloff, with West Texas Intermediate crude falling more than 5% at its intraday low during the US trading session, while Brent crude saw its biggest drawdown exceed 6% from the prior day's settlement. By the August 26 trading session, WTI was quoted at $80.69 per barrel and Brent at $85.19, with both major benchmark contracts trimming losses to around 2%.
In the domestic market, fuel oil futures led the decline with a drop of more than 8.4% at the opening bell, while crude oil fell over 6.3%. Related chemical products including synthetic rubber, ethylene glycol, paraxylene, methanol, and propylene all tumbled more than 5%. When the A-share market opened, the oil and gas exploration chain followed suit with a sector decline of roughly 2.5%, dragging several adjacent sectors into modest losses.
The primary catalyst behind this round of declines across the crude oil supply chain stems from expectations of cooling tensions between the United States and Iran, alongside hopes for the resumption of shipping through the Strait of Hormuz. The geopolitical risk premium that had built up in prior sessions is being rapidly squeezed out of the market. According to foreign media reports citing anonymous sources from Pakistan's military and Iran's security establishment, the US and Iran have reached a consensus on the framework of a ceasefire agreement, with terms that include freedom of navigation through the Strait of Hormuz. Both sides are expected to disclose relevant details in the coming days and revive the Islamabad Memorandum of Understanding brokered by Pakistan, initiating negotiations and technical meetings.
Following the news, futures markets saw a wave of concentrated long liquidation, with algorithmic trading further amplifying the price swings. It should be noted, however, that this ceasefire consensus currently rests solely on anonymous sources, and neither Washington nor Tehran has released an official agreement text. The market is trading on expectations rather than confirmed reality.
Reports indicate that the current diplomatic mediation is proceeding along two parallel tracks. On the political front, Pakistan's Army Chief of Staff General Asim Munir completed a one-day visit to Iran, holding intensive talks with senior Iranian officials centered on de-escalating the conflict and resuming shipping through the strait. The Islamabad Memorandum of Understanding signed in June originally carried a 60-day validity period, which expired in mid-August, and parties are now working to reactivate this framework. However, Iran has drawn a clear red line: the reopening of the Strait of Hormuz is contingent on the US fulfilling all commitments under the memorandum, including achieving a multi-front ceasefire, lifting blockades, and resolving the situation in Yemen. Without US compliance, navigation remains off the table.
On the technical and operational level, Iran and Oman are simultaneously advancing plans for strait navigation, with both sides discussing the establishment of a temporary shipping corridor and the initiation of mine-clearing operations. They also aim to negotiate the demarcation of permanent commercial shipping lanes within 30 to 60 days. Yet Tehran has made clear that a temporary understanding does not equate to an immediate and full opening of the strait, and actual operations remain highly dependent on the outcome of US-Iran political negotiations.
The United States is also signaling a shift in policy direction. Internal State Department documents show that American diplomatic personnel evacuated from the Middle East due to the conflict are set to begin returning to their posts as early as this week. The State Department frames this as a routine adjustment of staffing based on security assessments, but many internal officials view the return of diplomats as evidence of easing tensions. Secretary of State Marco Rubio has briefed allies that Washington has no immediate plans to launch a new round of military strikes against Iran, with pressure tactics shifting more toward economic sanctions.
Market analysts point out that the Strait of Hormuz handles roughly one-quarter of global seaborne crude trade. The tail risk of a strait blockade and hard supply disruption has been a key pillar supporting oil prices over the past period. Now, with multiple diplomatic signals emerging, the probability of a large-scale conflict is being revised downward by the market, and the risk premium is correspondingly fading.
However, drawing lessons from the previous round of mediation, even with positive signals on the diplomatic front, there remains a significant probability that US-Iran negotiations could collapse. The current ceasefire rumors have yet to receive official confirmation, and Iran's precondition of US compliance before navigation resumes sets a high bar for practical implementation. Even if a temporary shipping lane framework is reached, mine clearance, route management, and security mechanisms still need to be put in place, leaving considerable distance from restoring large-scale commercial shipping at pre-war levels. The deep-seated contradictions between the US and Iran over nuclear issues and regional proxy conflicts remain unresolved, and the possibility of localized frictions or tanker attacks persists.
Looking ahead, whether Washington and Tehran issue a formal ceasefire document in the coming days, whether the US can accept Iran's stated compliance conditions, and actual tanker transit data through the Strait of Hormuz will serve as the core barometers for determining whether the geopolitical premium continues to erode. Should negotiations hit another snag, the squeezed-out risk premium could quickly flow back into the market.