Oil falls more than 7% as Iran and US pause strikes over Strait of Hormuz

Oil prices experienced a substantial decline, with Brent crude falling more than 4% to below $74 a barrel, marking its lowest point since the conflict's inception. US West Texas Intermediate (WTI) crude also dropped by nearly 4% to approximately $70 a barrel. This downturn was attributed to a pause in US-Iran strikes and an improvement in shipping traffic through the Strait of Hormuz.

Adding to the downward pressure, Oman announced a temporary, fee-free shipping transit corridor through the Strait of Hormuz in coordination with the International Maritime Organization. This development, coupled with signs of increasing tanker movements, alleviated fears of prolonged supply shortages. Notably, 72 ships carrying roughly 20 million barrels of crude passed through the Strait within a 24-hour period, restoring traffic to pre-conflict levels. The UAE also restored oil exports to nearly 85% of pre-conflict levels by early June.

The market was further reassured by a 60-day memorandum of understanding signed between the US and Iran on June 17, which analysts like Sasha Foss of CSC Commodities believe signals an easing of supply disruptions. Despite the improved traffic, some uncertainty persists regarding future operations through the Strait once negotiations conclude. Robert Yawger of Mizuho suggested that oil production and exports could recover faster than anticipated.

While short-term market conditions remain volatile due to recent supply disruptions and a ninth consecutive weekly decline in US commercial crude inventories—down 6.1 million barrels to 412.1 million barrels, 7% below the five-year average—the longer-term outlook suggests higher supplies. This is expected as OPEC increases production and Venezuelan oil re-enters the market, according to David Russell, an analyst at TradeStation.

Earlier conflicting reports noted Brent crude nearing $97, specifically closing at $96.78 a barrel on Friday, climbing around 27%, alongside a projection by Kpler that the Strait of Hormuz would remain closed until 2027. However, the more recent information indicates a significant price drop as traffic through the Strait recovers, suggesting an earlier and more positive resolution than initially feared.