Oil prices have sharply declined to a three-month low amid increasing expectations that a forthcoming US-Iran deal will lead to the reopening of the Strait of Hormuz, a crucial maritime route for global oil supply. Benchmark Brent crude futures stabilized near $79 a barrel after an earlier dip of up to 1.1%, while West Texas Intermediate (WTI) trades above $76. This interim agreement, set to be signed on Friday, promises financial incentives for Iran, including the immediate right to resume oil sales.
In anticipation of the waters becoming more navigable, many shipowners are repositioning their vessels. Notably, two tankers that were en route to Africa have altered their courses, shifting towards the Middle East according to vessel-tracking data.
The market has demonstrated signs of loosening supply, as reflected in the narrower prompt spread of Brent crude. The difference between its two nearest contracts tightened to just 14 cents a barrel in backwardation, suggesting a bullish market where immediate prices are higher than future ones. This gap has significantly closed from $9.65 in early April, which had raised concerns about tight supplies.
Recent diplomatic efforts between Washington and Tehran are perceived to ease the current tightness in global energy markets, leading to a rapid decline in crude prices. Producers and traders are now evaluating the durability of the expected agreement and the timeline for resuming transits through the Strait of Hormuz, which had previously been disrupted.
Dennis Kissler, senior vice president for trading at BOK Financial Securities Inc., noted that traders still anticipate US naval escorts and mine-sweeping operations in the initial weeks post-agreement—potentially slowing the flow of oil traffic. However, the futures market is optimistic, with growing expectations that oil shipments will soon recommence.
While the finer details of the deal are still being discussed, a 14-point draft memorandum reportedly outlines a framework for 60 days of negotiations aimed at a formal end to hostilities and imposing new restrictions on Iran’s nuclear activities. Key stipulations in the draft include Tehran’s commitment to ensure the safe passage of merchant vessels as well as the lifting of the US blockade on Hormuz. This vital waterway connects the Persian Gulf to the Indian Ocean and historically has carried about 20% of the global oil supply during peacetime.
Parash Jain, HSBC Holdings Plc’s global head of transport and logistics research, indicated that the resumption of shipping will likely be gradual, cautioning against a sudden return to full operational status. He emphasized that shipping lines must be cautious of making costly route changes only to have to adjust back.
Moreover, the memorandum outlines US commitments to issue waivers for Iranian crude exports, petrochemicals, and related services, including banking and insurance.
The drop in crude prices has also driven down product prices, alleviating inflationary pressures for consumers. In the United States, the average gasoline price has approached $4 a gallon, having peaked above $4.56 in May, according to data from the American Automobile Association.
Changes in energy costs will be part of the considerations during a Federal Reserve meeting on interest rates, although no adjustments to borrowing costs are anticipated at this time.
Despite the expected revival of supply from Iran, US crude stockpiles continue to decline at a notable rate. A recent estimate from an industry group indicated that US inventories fell by 8.3 million barrels last week, with significant reductions observed at the Cushing, Oklahoma hub. Official inventory data is expected later today.
