Oil prices are nearing a three-month low as markets react to an anticipated interim peace deal between the US and Iran. Brent crude has fallen to below $80 a barrel, after a 15% drop, while West Texas Intermediate is also close to similar lows. This decline is largely attributed to expectations that the deal will reopen the crucial Strait of Hormuz, a waterway that typically carries about a fifth of global oil supplies, thus unleashing a new wave of oil supply into the market. This has helped ease inflationary pressures and reduce the burden on consumers, with average nationwide gasoline prices in the US dropping back towards $4 a gallon.
The interim pact, which is scheduled for formal signing on Friday, offers broad financial incentives to Tehran, including the immediate right to sell its oil and sanctions waivers for Iranian crude, petrochemical products, and related services like banking, insurance, and transportation. A 14-point draft memorandum outlines these provisions, including a requirement for Iran to ensure the movement of merchant ships and for the US to lift its blockade of Hormuz. The market's rapid loosening is reflected in Brent's much narrower prompt spread, at just 29 cents a barrel in backwardation, a significant drop from the $9.65 in early April.
Despite the expected boost in supply, energy insiders remain skeptical about how quickly the Strait of Hormuz can reopen and return to pre-war traffic levels. Analysts note that global oil inventories were depleted during the conflict and will take time to rebuild. While the deal is seen as easing tightness in global energy markets, experts warn that shipping operations through the Strait of Hormuz could take several months to return to normal, with some suggesting a month to 45 days for a full return to smooth vessel movement and oil pumping. This sentiment is reinforced by Saudi Aramco CEO Amin Nasser's caution that disruptions could delay market stability until 2027.
