Oil Prices Drop as Iran Tensions Cool, Dollar Rises

Oil prices fell for a second consecutive day on Tuesday, declining by about 1% as the market reacted to signs of easing tensions between the United States and Iran. A strengthening U.S. dollar added further downward pressure on crude markets.

By 0903 GMT, Brent crude futures were down 68 cents, or 1%, trading at $65.62 per barrel. U.S. West Texas Intermediate (WTI) crude saw a similar dip, falling 60 cents, or 1%, to $61.54 a barrel. This follows a more significant drop on Monday, when prices slid over 4%.

Geopolitical Risk Premium Fades

The primary driver behind the recent price decline is the potential for de-escalation in the U.S.-Iran conflict. U.S. President Donald Trump fueled this sentiment by stating that Iran was "seriously talking" with Washington.

Further supporting this outlook, officials from both nations told Reuters that nuclear talks are expected to resume in Turkey on Friday. While Trump warned of consequences if a deal isn't reached, the move toward dialogue has cooled market fears.

Iranian President Masoud Pezeshkian echoed a willingness to negotiate, posting on X that talks with the U.S. should be pursued to protect Iran's national interests, provided "threats and unreasonable expectations" are avoided.

Kelvin Wong, a senior market analyst at OANDA, noted that recent price volatility has been heavily influenced by this geopolitical risk. "The volatile price actions of oil seen in the last four weeks have been driven by the geopolitical risk premium factor that is linked to the current U.S. administration's expansionary foreign policy, especially the 'on-off' threats towards Iran," Wong explained.

Supply Dynamics and Dollar Strength Weigh on Crude

Beyond geopolitics, two other key factors are contributing to the bearish mood: a stronger dollar and shifting global supply chains.

A Stronger Greenback Curbs Demand

The U.S. dollar index has been trading near its highest point in over a week. A stronger dollar makes crude oil, which is priced in dollars, more expensive for buyers holding other currencies. This dynamic typically hurts global demand and weighs on prices.

Russia's Surplus and a New U.S.-India Deal

Global supply appears ample. Russian Deputy Prime Minister Alexander Novak stated Tuesday that Russia has sufficient fuel volumes and even enjoys a surplus, adding that its domestic oil products market stabilized last autumn.

Meanwhile, a new trade agreement between the U.S. and India is set to reroute global oil flows. President Trump announced a deal that slashes U.S. tariffs on Indian goods from 50% to 18%. In return, India has agreed to halt its purchases of Russian oil and lower other trade barriers.

Analysts at ING commented on the potential market impact, noting, "if we do see this happen, it will only lead to a further increase in the amount of Russian oil floating at sea."

According to Trump, who announced the deal after a call with Indian Prime Minister Narendra Modi, India has agreed to buy oil from the United States and possibly Venezuela, further altering established energy trade patterns.

Market Outlook: Choppy Waters Ahead

Looking toward the rest of the month, the market is expected to remain volatile. Priyanka Sachdeva, senior market analyst at Phillip Nova, anticipates that prices will stay highly sensitive to breaking news rather than following a clear trend.

"Looking ahead into February, prices are likely to remain choppy and range-bound," Sachdeva said, adding that they "are expected to stay highly reactive to headlines and macro cues rather than a decisive trend, with risk skewed to the downside."