Oil prices fall after U.S. says Iran ceasefire remains in place despite UAE attacks

Oil prices fell Tuesday after Defense Secretary Pete Hegseth said the U.S. ceasefire with Iran remained in place, easing fears that the region would return to full-scale war after attacks on the United Arab Emirates this week.

International benchmark Brent crude futures fell about 4% to close at $109.87 per barrel, while U.S. West Texas Intermediate futures lost nearly 4% to settle at at $102.27.

Oil prices rose more than 4% on Monday as the fragile ceasefire between the U.S. and Iran appeared close to unraveling. Iran launched drones and missiles at the UAE, while Washington said it had sunk Iranian vessels in the strategically vital Strait of Hormuz.

Gen. Dan Caine, chairman of the Joint Chiefs of Staff, told reporters Tuesday that Iran's attacks fall "below the threshold of restarting major combat operations at this point." Hegseth said the "ceasefire is not over."

"Ultimately the President is going to make a decision whether anything were to escalate into a violation of a ceasefire," Hegseth said. "Right now, the ceasefire certainly holds but we're going to be watching very, very closely."

Hormuz operation

The U.S. on Monday launched an operation to reopen the Strait of Hormuz to commercial traffic. Hegseth said two U.S. commercial ships along U.S. destroyers transited the strait "showing the lane is clear."

"We know the Iranians are embarrassed by this fact," the defense secretary said. "They said they control the strait. They do not."

Danish shipping company Maersk said one its vessels, the U.S.-flagged Alliance Fairfax, crossed the strait Monday under U.S. military protection.

Brent crude

Tensions, however, remain high. Speaking to Fox News on Monday, Trump warned that Iran would be "blown off the face of the earth" if it targeted U.S. ships safeguarding commercial traffic through the strait.

Iranian Foreign Minister Abbas Araghchi said in a post on social media that recent events in the strait "make clear that there's no military solution to a political crisis."

He added: "As talks are making progress with Pakistan's gracious effort, the U.S. should be wary of being dragged back into quagmire by ill-wishers. So should the UAE."

Iraq, an OPEC producer, is reportedly offering its term buyers steep discounts for crude loaded this month, according to Bloomberg, although tankers will reportedly have to be willing to transit the Strait of Hormuz to collect the barrels. CNBC has contacted Iraq's oil ministry and is awaiting a response.

'Not just a question of price'

Global oil inventories are not yet at critically low levels, but the pace of drawdowns and uneven distribution across regions is raising concerns about localized shortages, Goldman Sachs wrote in a note on Monday. 

The bank said easily accessible buffers of refined products are being depleted rapidly, particularly in petrochemical feedstocks such as naphtha and LPG, as well as jet fuel.

Chevron CEO Mike Wirth warned Monday that fuel shortages were a growing concern in some regions of the world as the strait remains closed.

"I think as people look at the realities of very tight supplies, it's not just a question of price," Wirth told CNBC's David Faber at the Milken Institute Global Conference.

"It's actually — can we get the fuel? I think over the course of the next several weeks, we'll see those effects begin to move throughout the system," the CEO said.

Total global oil stocks, including crude and refined products held both on land and at sea, are estimated at about 101 days of demand currently and could fall to 98 days by end of May, Goldman said.

While that remains above emergency thresholds, the aggregate figures mask sharper shortages in specific regions and products, especially where export restrictions limit supply flows.

"Our estimates of supply of refined products and countries' own crude stocks point to higher risks of product scarcity in South Africa, India, Thailand, and Taiwan," the bank's analysts pointed out.

— CNBC's Emma Graham contributed to this report.