Crude oil prices have been fluctuating within a wide range recently. Following the U.S. military action against Iran that resumed in early September, oil prices experienced two consecutive weeks of significant upward movement. However, with the U.S. interest rate hike and Saudi Arabia's recovery in transport capacity, prices have pulled back considerably.

The main reason behind this is that a large portion of the domestic market's earlier premium was supported by expectations of Middle East supply disruptions and rising freight costs. As geopolitical tensions showed signs of easing, the accumulated premium quickly unwound.

Where the market stands

On the geopolitical front, the key factor disrupting the market has been the evolution of the U.S.-Iran conflict in the Middle East. Recently, U.S. military operations against Iran have entered their final phase, easing concerns about further escalation. Neither side has intensified bombing attacks against the other, and Iran has not moved to block the Strait of Hormuz as some had feared, which has mitigated the extreme risk of supply interruptions.

Notably, Trump has approved visas for Iranian representatives to attend the UN General Assembly in New York. During this period, he plans to hold talks with leaders from six Gulf nations—Saudi Arabia, the UAE, Qatar, Bahrain, Kuwait, and Oman—and has indicated that he is preparing to make a "big decision," with further military strikes against Iran listed as one option. Combined with Trump's earlier statements about possibly ending the U.S.-Iran conflict before or after the midterm elections, it appears that a major escalation in military action is unlikely. Trump has also repeatedly said that the war will soon come to an end, which may suggest that this round of talks could produce a meaningful outcome on the Iran issue.

However, it should not be overlooked that the core demands of both Iran and the U.S. remain unresolved. Iran's insistence on retaining its nuclear program and its call for equal international trade rights have yet to gain Trump's approval, which could set the stage for a difficult negotiation process ahead.

On the commodity side, Houthi attacks on Saudi ports and tankers in the Red Sea region, with claims that all ships except Saudi ones were safe, significantly pushed up freight rates. But with the U.S. offering to help Saudi Arabia repair its transport pipelines and reports that Saudi Arabia is using "ship-to-ship" transfers to export crude, concerns about supply disruptions have been suppressed.

While Iran has not publicly claimed responsibility for the Houthi attacks, their actions are consistent with Iran's defiant stance, and this has been one of the core factors driving recent oil price volatility. If the Houthis were to gain control of the Bab-el-Mandeb Strait, Iran and its allied forces would command two of the most critical chokepoints in the Middle East, fundamentally altering the export routes available to regional oil producers.

There are also reports from Lebanon that Saudi Arabia has asked Oman to mediate a two-week ceasefire with the Houthis, with discussions planned on humanitarian demands and an agreement expected to be announced over the weekend. The pipeline that was attacked previously transported around 4 to 5 million barrels per day—roughly 4% to 5% of global supply—while the Strait of Hormuz was under navigation restrictions. This forced Saudi Arabia to rely on ship-to-ship transfers near Oman's Sohar port to bypass the strait and the damaged pipeline, while also increasing loading volumes at the Ras Tanura and Juaymah terminals in the Gulf. These moves suggest Saudi Arabia is working to open new transport routes, which could ease supply-side pressures to some extent.

Financial factors in play

On the financial side, the Fed's September meeting concluded with a 25-basis-point rate hike, ending the more than three-year easing cycle that began after the Russia-Ukraine conflict. Markets are now gradually pricing in the end of global liquidity accommodation. A key question is whether the inflation transmission path triggered by this year's high oil prices can sustain a long-cycle effect, which will determine whether the Fed can continue this new hiking cycle. The market currently prices in roughly two to three more hikes before mid-next year.

If high oil prices persist, structural inflation stays elevated, and economic growth shows no clear signs of cooling while U.S. data remains solid, market expectations for additional rate hikes could shift, leading to stronger downward pressure on oil prices from the financial side.

Key drivers and outlook

Overall, crude oil prices remain primarily driven by geopolitical factors. On the political front, the U.S.-Iran conflict combined with the Saudi-Houthi tensions in the Red Sea continues to disrupt the geopolitical landscape. If tensions ease significantly over the weekend and early next week, the previously accumulated geopolitical premium could unwind rapidly, potentially leading to a notable drop in oil prices. Conversely, any renewed escalation would provide fresh upward momentum, and with freight costs surging and Middle East energy shortages, domestic energy prices could break above previous highs.

It is important to note that even if geopolitical tensions cool in the short term, structural risks on the supply side remain. Whether the Saudi-Houthi ceasefire agreement can be genuinely implemented, and whether negotiations between the U.S. and Middle Eastern nations proceed smoothly, remain highly uncertain. As such, oil prices are likely to continue experiencing significant volatility in the near term. It is advisable to trade with light positions and short-term strategies, exercise caution in holding positions, and consider deploying out-of-the-money options to hedge against geopolitical volatility at a relatively lower cost. This content is for reference only.

Author profile: Fan Lei is an analyst at Chang'an Futures, holding a master's degree and futures investment advisory certification number Z0021225. He has a solid theoretical foundation and international perspective. Since entering the futures industry, he has focused on macroeconomic research and analysis of the crude oil and chemical sectors, as well as options. He excels at applying fundamental analysis and policy-oriented frameworks to form market judgments, and is committed to creating value for clients with professional expertise and a sincere attitude.