Oil falls 4% as US, Iran reach deal to reopen Strait of Hormuz
Oil prices slid to their lowest level since March on Monday, news agency Reuters reported, after US President Donald Trump and Iran’s deputy foreign minister said the two countries reached an initial agreement to end their war and restore traffic through the Shehbaz Sharif, whose country mediated the talks, said the US and Iran would sign a memorandum of understanding in Switzerland on 19 June. Trump said on Sunday that the Strait of Hormuz would reopen toll-free and that Washington would end its naval blockade of Iranian ports, Reuters reported.
Iran’s semi-official Mehr news agency separately reported that the draft agreement provided for the strait to reopen within 30 days, under arrangements set by Tehran.
Markets unwind war risk premium
The Strait of Hormuz is a chokepoint for around a fifth of the world’s oil and liquefied natural gas supplies, and the region has lost millions of barrels of output over the more than three months it has remained closed, Reuters said.
Tim Waterer, chief market analyst at KCM Trade, told Reuters that the geopolitical risk premium built into crude prices was now unwinding sharply as traders priced in the prospect of restored oil flows.
Recovery pace, nuclear talks remain key
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Investors are also watching how quickly Middle Eastern producers can restart output and exports after war damage, and whether shipping traffic will return to the region, according to Reuters.
Commonwealth Bank of Australia commodities strategist Vivek Dhar said in a note cited by Reuters that while these uncertainties pointed to some upside risk to the bank’s year-end Brent forecast of $80 a barrel, flows through the strait would only need to recover to 60-70 per cent of pre-war levels to push markets back towards pre-war oversupply conditions.
Iran’s deputy foreign minister, Kazem Gharibabadi, said a more comprehensive agreement would be negotiated over a 60-day ceasefire period, Reuters reported. Separately, Britain, France, Germany and Italy said on Sunday they were prepared to lift sanctions on Iran in exchange for steps on its nuclear programme.
IG market analyst Tony Sycamore told Reuters that given the uncertainty around the coming 60 days of talks particularly on the nuclear issue crude prices were unlikely to fall much further in the immediate term.