Oil prices fell significantly on Tuesday, reaching a three-month low, as anticipation of a US-Iran peace deal signaled a potential reopening of the Strait of Hormuz. Brent crude futures were down $1.70, or 2%, at $81.47 a barrel, touching $81.00, its lowest since March 4. West Texas Intermediate (WTI) also dropped $1.89, or 2.3%, to $78.86 a barrel, its lowest since March 10. The previous day, oil prices had already declined by nearly 5% following President Trump's announcement of a memorandum of understanding to end the US-Israel war with Iran, though full details were not yet released. The conflict had previously closed the Strait of Hormuz, a critical waterway through which roughly one-fifth of global oil supplies typically pass.
The agreement, expected to be formally signed in Geneva on Friday, aims to reopen the strait immediately and includes a 60-day ceasefire for negotiations on issues such as Iran's nuclear program. Analysts from Morgan Stanley noted weakening physical oil markets, with projections now assuming Gulf exports return to pre-war levels by the end of July, sooner than previous estimates of late August. Some shipping activity has already been observed, with ships quietly moving barrels along Oman's coast with US Navy support, though most shippers await full safety assurances, including the clearing of mines, before openly transiting the strait.
The downturn in oil prices was further exacerbated by weak demand signals, particularly from China. In May, China's crude imports slumped by 29% to their lowest in eight years, and Saudi crude shipments are also expected to decrease in July. Fawad Razaqzada, a market analyst at Forex.com, highlighted that weaker-than-expected Chinese data suggests a potential weakening of demand from the world's second-largest economy, coinciding with an expected increase in oil supply due to the easing of restrictions on Iran. Despite the positive outlook for supply, analysts caution that volatility risks remain given the ongoing uncertainty surrounding the full details and permanence of the truce.
Following the news, Brent crude fell 4.03 percent to $79.82 per barrel and WTI dropped 4.48 percent to $77.13. Soojin Kim, a research analyst at MUFG, stated that oil prices fell "as markets increasingly priced in the prospect of a US-Iran agreement that could restore energy flows through the Strait of Hormuz." The conflict, which began on February 28, had caused oil prices to soar close to $120 per barrel in March. While the reopening of the strait is anticipated, shipping traffic is expected to recover gradually due to ongoing safety concerns, such as sea mines. Inventories around the world were depleted during the months of disruption and even with new supplies coming, analysts predict that it will take time to completely rebuild stockpiles.
