Key Takeaways
Brent crude futures dropped more than 5% to below $98 a barrel, the lowest in over a month, as the United States and Iran edged closer to a potential peace agreement that could reopen the Strait of Hormuz.
"A lot of oil was trading on worst case assumptions for weeks," said Haris Khurshid, chief investment officer at Chicago-based Karobaar Capital LP. "But once it became clear talks were still alive and escalation wasn’t accelerating, a chunk of that fear premium comes out pretty fast.”
The global crude benchmark Brent fell as much as 5.7% to $97.64 a barrel, while West Texas Intermediate was near $92. Before the conflict began in February, Brent traded around $72 a barrel. The potential deal could see the Strait of Hormuz, which handles a fifth of the world's oil, de-mined and reopened, according to a Washington Post report.
While the market is pricing in relief, a durable resolution remains distant. Key issues including sanctions, the fate of Iran's nuclear program, and the logistics of restarting production and shipping could mean high price volatility will persist well into the northern winter, even if a ceasefire is signed this week.
The path to an agreement is proving rocky. President Donald Trump said in social-media posts he wouldn’t “rush” into a deal that “isn’t even fully negotiated yet,” and that Washington’s blockade of Iranian ports would remain until a deal was signed. Meanwhile, Iran’s Tasnim news agency reported the draft could collapse, claiming the U.S. was obstructing key clauses.
Despite the conflicting signals, the prospect of de-escalation has pulled prices down. “The two sides may be closer on a ceasefire and Strait of Hormuz reopening framework, but still far apart on the harder issues,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore.
Even if a deal is signed today, physical markets would remain undersupplied for months. Gulf producers, who have cut output by 10 million barrels per day, would need two to four weeks to check equipment and restart wells, according to industry experts.
The situation for liquefied natural gas (LNG) is more severe. Qatar's Ras Laffan facility, which supplies nearly a fifth of the world's LNG, has been shut since March. Recent missile strikes damaged two liquefaction units, accounting for 3% of global supply, which will take three to five years to repair, according to Qatar's energy minister. Restoring the remaining operations could take up to seven weeks, estimates Anne-Sophie Corbeau of Columbia University.
Clearing the backlog of stranded vessels and securing new insurance for the high-risk region presents another hurdle. War-risk insurance rates have soared to as high as 10% of a vessel's value for the riskiest voyages.
This article is for informational purposes only and does not constitute investment advice.
