Oil fell 7.6% in a day. No new barrel had to arrive

What happened

Oil prices fell sharply on Monday 2 November. The January Brent contract, the international benchmark, settled 7.6% lower at $104.77 a barrel, and US crude (WTI) fell 7.4% to $96.46. It followed reports that Iran's supreme leader had approved the government's pursuit of negotiations to end the war, after meetings with Qatari mediators, and comments from US officials that progress had been made. Asked whether strikes on Iran would resume after the midterm elections, President Trump said "no", according to a media pool report.

No deal has been reached. The two sides have not agreed terms for fully reopening the Strait of Hormuz, and analysts cautioned that earlier rounds of diplomacy had come to nothing.

Why the price can fall without more oil

An oil price reflects two things: the oil available today, and what traders fear about tomorrow. When there is a real chance that supply will be cut, buyers pay extra to secure barrels now and to protect themselves against a further jump. That extra is the risk premium. It is not a number anyone publishes, but it is visible when prices move sharply on news that changes no physical flow.

Monday was such a day. "A lot of risk premium is seeping out of both crude oil and European natural gas," said Darrell Fletcher of Bannockburn Capital Markets. The fall was amplified by computer-driven funds that follow price trends: as prices dropped, they cut their bets on higher oil, adding to the selling.

Why prices may not fall back to pre-war levels quickly

Even if a deal is reached, the physical market has been squeezed for months. The head of ADNOC, Abu Dhabi's national oil company, said the world has drawn nearly 1 billion barrels from inventories since the war began. Rebuilding those stocks adds demand. At $104.77, Brent is still far above its level at the start of the year.

Where it sits in the chain

Oil is the external shock at the start of the chain. A lower price, if it lasts, feeds through to fuel costs within weeks and to inflation (Link 1), which matters for the central banks deciding this week.

What to watch

• Any follow-up meeting between Iran and the mediators, and terms for reopening Hormuz.
• Whether the gap between near and later oil contracts narrows, a sign the shortage is easing.
• Euro-area inflation on 4 November and the Bank of England on 5 November.