Oil falls more than 6% as Iran and US pause strikes over Strait of Hormuz

Oil prices experienced a sharp decline on Wednesday, with Brent crude falling over 4% to below $74 a barrel and U.S. West Texas Intermediate (WTI) crude dropping nearly 4% to around $70 a barrel. This decrease was primarily driven by the resumption of shipping through the Strait of Hormuz, a critical waterway for over 20% of the world's crude oil and liquefied natural gas shipments. The recovery in traffic eased concerns about supply shortages after recent talks between the United States and Iran.

The improvement in shipping activity follows a 60-day memorandum of understanding signed by the U.S. and Iran on June 17, which gave the market confidence that supply disruptions linked to the strait's partial closure were alleviating. Analysts like Sasha Foss of CSC Commodities noted this agreement as a key factor. Furthermore, the International Energy Agency reported that the UAE had restored oil exports to nearly 85% of pre-conflict levels by early June, indicating broader regional stability.

Despite the positive developments in the Strait of Hormuz, short-term market conditions remain uncertain due to recent supply disruptions and dwindling U.S. crude inventories. The U.S. Energy Information Administration (EIA) reported a 9th consecutive weekly decline in commercial crude inventories, which fell by 6.1 million barrels to 412.1 million barrels, now about 7% below the five-year average. However, the longer-term outlook suggests higher supplies as OPEC increases production and Venezuelan oil re-enters the market. Robert Yawger, an analyst at Mizuho, indicated that oil production and exports could recover faster than anticipated, with David Russell of TradeStation noting "a flood of oil that's coming."

Oman also contributed to the de-escalation by announcing a temporary, fee-free shipping transit corridor through the Strait of Hormuz in coordination with the International Maritime Organization. The U.S. Treasury also issued a temporary waiver of Iranian crude export sanctions from June 22, allowing dollar-denominated transactions. Analysts anticipate Iranian exports to recover if these easing measures persist, which would add more crude to global markets and further depress oil prices. Despite the current improvement, uncertainty lingers regarding the long-term normalcy of traffic through the Strait of Hormuz once negotiations conclude.