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By Myra P. Saefong

Oil dropped Wednesday, putting prices on track for their largest one-week decline since 2020

Oil prices plunged Wednesday after the Democrats won the House of Representatives and the Senate in the midterm elections.

Oil prices dropped Wednesday, putting them on track for their largest one-week decline since 2020, as investors weigh the odds that a Democratic sweep in the U.S. midterm elections could lead to a quicker end to the Iran war.

Democrats won control of both the House of Representatives and the Senate, and are expected to challenge Republican President Donald Trump's handling of the U.S.-Israel war with Iran. Oil prices saw a steep drop in response, while U.S. benchmark stock indexes rallied on Wednesday.

"The sharp drop in oil and the broader stock market's rise both reflect one clear bet: the Democratic midterm sweep is rewriting the Iran war playbook in real time," said Manish Raj, managing director at Velandera Energy Partners. That makes the "political price of continuing the conflict too steep for the White House," he added.

Global oil prices lost nearly 9% Wednesday to settle at $94.62 a barrel - taking their week-to-date loss to almost 17%, which would be the worst weekly decline for Brent crude (BRN00) since April 24, 2020, according to Dow Jones Market Data. U.S. benchmark West Texas Intermediate crude (CL.1) settled at $88.12, down about 8% for the session and trading 15% lower week to date.

Oil is in "freefall" as markets price in a faster path to restored Strait of Hormuz crude flows, rather than another round of escalation, according to Raj. "This is a classic risk-on move that says investors now expect less geopolitical drag ahead," he said.

U.S. benchmark stock indexes were broadly higher as the election outcome removed some political uncertainty, with the Dow Jones Industrial Average DJIA up 2.9%, the Nasdaq Composite COMP gaining 2.1% and the S&P 500 SPX climbing 1.9%.

Democrat congressional control over military spending provides a new "vector to influence foreign policy," said Jeremy Richardson, senior portfolio manager, global equities, at RBC Global Asset Management, in a note to clients. Arguably, "the midterms have increased incentives for agreeing to a ceasefire which, if delivered, would provide relief to energy prices, inflation, interest rates, and corporate earnings," he wrote.

But the reality of a diplomatic solution in the near term to the Iran war, may still remain quite distant, said Jordan Rizzuto, managing partner and CIO at GammaRoad Capital Partners.

Prices for oil had taken a dive earlier this week, with Brent and WTI both losing more than 7% on Monday on reports of indirect mediation efforts between the U.S. and Iran.

In a post on X Wednesday, U.S. Vice President J.D. Vance blamed the Republican losses on the Iran war. His "blunt admission that the war cost Republicans the election only poured gasoline on the fire," said Velandera Energy's Raj. "It confirmed what the market already smelled: The calculus has shifted towards peace and lower prices at home."

However, the real driver is not the election result itself, according to Raj, but rather the "sudden belief that Congress will make prolonged war funding difficult and further strikes politically edgy," he said. "All these point to a lower dollar sign at the [gasoline] pump."

Retail prices for gasoline have already declined in the latest week, but remain well above year-ago levels. They may still need to fall further to help restore balance in physical supply and demand in the coming months, said GammaRoad Capital's Rizzuto.

Crack spreads - the difference between crude-oil prices and the prices of refined products - have retreated from multidecade highs, offering some relief for the inflation outlook and potentially supporting equities, Rizzuto noted. But they remain elevated, suggesting that price pressures in refined-product markets have yet to fully subside.

In other words, inflation may be starting to ease with oil prices falling, but it still has "quite a bit further" to go before it meaningfully comes off its current level, Rizzuto said.

Isabel Wang contributed.

-Myra P. Saefong

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