Will the oil price drop further following the Gaza settlement

13th October 2025

It's possible though not guaranteed that oil prices could fall further following the Gaza peace deal.

A breakdown of the key drivers and risks

Oil prices fell after news of a ceasefire/reduced tensions in Gaza reflecting a decline in the "geopolitical risk premium" built into prices.

Some analysts estimate that the peace deal might shave off 1-2 % from Brent crude via the risk.

The easing of conflict fears allows more focus on fundamentals: supply, demand, inventories.

So the initial move downward seems to have already partly priced in the reduced tension.

What could push prices lower further

Supply surplus / creeping oversupply
If major producers (OPEC+, Russia, U.S.) maintain or increase output while demand growth is weak, excess supply could push prices down.

Weak demand / economic headwinds
Slower growth in major economies, energy efficiency, or weak industrial activity could drag demand lower.

Strong U.S. dollar
Oil is priced in dollars, so a stronger dollar makes oil more expensive in other currencies potentially depressing demand.

Sustained political stability
If the settlement proves durable (i.e. no flare-ups) then the geopolitical risk premium may remain suppressed removing support from prices.

What might limit further drops (or even reverse them)

Geopolitical flare-ups
The Middle East remains volatile. If conflict elsewhere (Iran, Strait of Hormuz, etc.) intensifies, prices could rebound sharply.

Supply constraints / proactive cuts
If key producers respond by cutting production to support prices, that would act as a floor.

Demand surprises
If energy demand picks up (e.g. from unexpected industrial growth, cold winters, etc.), that would boost prices.

Given current signals there is room for further downward movement in oil prices, but probably in a limited and gradual way rather than a sharp collapse. Much depends on global supply/demand balance and whether the peace in Gaza holds or unravels.

Is the dollar weakening and will it knock on into oil prices - Basically after the ins and outs is had to predict. Here is a quick look at some variables.

The U.S. Dollar Index (DXY) is trading around 98.5 as of recent data.

Year-to-date, the dollar has weakened significantly (down 9-10 % vs a basket of major currencies).

Some banks and analysts believe this weakening has further to go. For example, Morgan Stanley sees potentially another ~10 % decline in the dollar over the next 12 months.

Drivers for further dollar weakness could include:

Narrowing interest rate differentials
If the Federal Reserve cuts rates while other central banks stay more hawkish, the relative advantage of holding USD declines.

Policy uncertainty / fiscal deficits
High U.S. debt, fiscal strain, and political uncertainty can erode confidence in the dollar.

Capital flows & hedging behaviour
Foreign investors holding U.S. assets may increasingly hedge against dollar declines or reallocate toward non-dollar assets.

Risk appetite & global sentiment
In a more "risk-on" environment, investors may favour higher-yielding, non‑U.S. currencies.

So the case for a continued weakening dollar is plausible, though not guaranteed.

Why a weaker dollar tends to support oil prices

The basic mechanism is:

Oil is globally priced in U.S. dollars.

When the dollar weakens, that makes oil cheaper in local currency terms for buyers outside the U.S.

That loss of "currency friction" tends to boost demand, or at least prevent demand destruction.

Also, some oil producers may resist large price cuts when real returns erode under a strong dollar — so their pricing strategies may shift when the dollar weakens.

Empirical studies also suggest that currency and interest rate/financial factors explain a nontrivial share of oil price fluctuations.

As one commentary puts it:

“A weaker dollar also reduces the purchasing power of oil exporters ... nominal oil prices remain constant while the dollar declines ... the result … is higher prices.”

In practice, many recent articles note that declines in the dollar have helped oil price recoveries.

But it's not a guaranteed or dominant effect

Several caveats and countervailing forces:

Supply / demand fundamentals dominate
If there is a strong oversupply, weak demand, or aggressive production increases (e.g. from OPEC+ or U.S. shale), those forces can overwhelm any “dollar effect.”
For example, the U.S. EIA has raised its forecast for U.S. oil output, warning that oversupply could push down prices.
Reuters

Geopolitical risk premiums
Conflicts, sanctions, or supply disruptions can impose a separate “risk premium” on oil prices that may dominate over currency effects.

Interest rates & real yields
Currency moves are often linked with interest rate expectations. If the dollar weakens because U.S. rates are cut (or expected to be cut), that may reflect weakening economic conditions that reduce oil demand too. In other words, the same forces that push the USD down might also reduce oil demand.

Market positioning, speculation, hedging
Traders, funds, and hedgers may react in complex ways to dollar moves, and sometimes the correlation can break or reverse (i.e. during periods when oil and the dollar move in the same direction, though that's often viewed as anomalous).
OilPrice.com

Timing and magnitude matters
Small or short-lived dollar moves may not have much effect — the market often “looks through” minor swings unless they are sustained. The transmission mechanism is not instantaneous and is often moderated by other variables (logistics, storage, contracts, local currency issues, etc.).

My overall view: will a weakening dollar knock into oil prices — how much?

Expect a weakening dollar to provide support to oil prices going forward, especially if the decline in USD is sustained. But view it as a contributory tailwind not the main driver. The stronger influences will still be:

whether supply remains tight or becomes loose

global demand trends (especially in major economies like China, U.S., India)

geopolitical shocks or disruptions