Oil Prices Fall 4% as Traders Shrug Off U.S. Sanctions on Iran

Oil prices dropped about 4% to one-week lows Tuesday as traders viewed Washington's latest sanctions campaign against Iran as a smaller threat to crude supplies than military escalation. Brent fell to $88.43 a barrel and WTI to $81.67, even as shipping and refinery disruptions kept supply risks in focus.

NEW YORK, Aug 25 (Reuters) - Oil prices fell about 4% to a one-week low on Tuesday as traders shrugged off the latest U.S. sanctions campaign against Iran, viewing economic pressure as posing less risk to oil supplies than a military escalation.

Brent crude futures were down $3.74, or 4.1%, at $88.43 a barrel by 2 p.m. ET (1800 GMT), while U.S. West Texas Intermediate crude futures fell $2.85, or 3.4%, to $81.67, paring earlier losses.

Both benchmarks hit their lowest levels since August 17.

Why Traders Discounted the New U.S. Iran Sanctions

The shift from military conflict to economic pressure in the U.S.-Israeli war with Iran has reduced some of the oil market's anxiety, said Saxo Bank head of commodity strategy Ole Hansen, adding the U.S. sanctions announcement was not as forceful as some traders had expected.

Treasury Secretary Scott Bessent unveiled the measures on Monday, almost six months into a conflict the U.S. has been unable to resolve. But he declined to identify the countries targeted or say when penalties would take effect, adding he would give them time to comply with the new directives.

The economic pressure campaign has revived expectations of talks between the U.S. and Iran to resolve their conflict, which began when the United States and Israel launched military strikes on Tehran at the end of February, oil trading adviser Ritterbusch and Associates said.

Still, Tuesday's sharp decline in oil prices appears to be an overreaction by market participants, Ritterbusch and Associates said. They cautioned traders that the market could swing sharply higher if Iran unleashes military strikes on U.S. installations in the Middle East.

Iran has vowed to retaliate against the U.S. sanctions and expressed confidence that major trading partners would resist Washington's pressure campaign.

Why Supply Disruption Risks Remain

"Iran still retains the ability to respond by disrupting shipping, which continues to keep a residual premium in the oil price," said Tim Waterer, chief market analyst at KCM.

An oil tanker was struck on Tuesday by an unidentified projectile and disabled about nine nautical miles (16.7 km) northeast of Oman's Ash Shishah, the United Kingdom Maritime Trade Operations said.

Just two tankers transited the Strait of Hormuz on Monday, the lowest daily tally of commodity vessels since early May, with both entering the Gulf, shipping data showed.

The conflict has heightened concerns over the strait, the waterway through which roughly one-fifth of global oil consumption passed before the Iran war began on February 28, raising fears of broader supply disruptions.

The supply disruptions have prompted countries to draw down commercial and strategic oil reserves.

Refinery Disruptions Add to Supply Concerns

Elsewhere, the Novoshakhtinsk oil refinery in Russia's southern Rostov region was damaged by a Ukrainian drone overnight and suspended operations, the regional governor said, while a fire broke out at the Atyrau oil refinery in western Kazakhstan on Tuesday, owner KazMunayGas said.