Crude Oil Slides to Three-Month Low on Iran Deal
A US-Iran interim peace accord and revived Strait of Hormuz traffic drag crude prices toward pre-conflict levels
Diplomacy improves while crude retreats in the wake of reopening of Hormuz port
Tankers have avoided the narrow Strait of Hormuz, through which about one-fifth of the world's traded oil passes, for months due to Iranian mines and the risk of drone attacks. That equation turned around this week.
On June 24, WTI crude dropped more than 3% for the day to $70.95 per barrel, marking a greater loss than most market participants had been expecting in such a rapid fashion, and it has lost about 24% of its value in the last month.
The immediate cause was political. The deal between the U.S. and Iran was struck, and so was a return for Brent crude as the international benchmark fell 2.3% to drop to just about 7% above its pre-U.S.-Israel military campaign level from Feb.
The Hormuz Factor
Officially, the Strait of Hormuz was closed. The IEA estimated a loss of 14 million barrels a day in the world oil market, due to the blockage. Dropping that supply vacuum had pushed Brent up to an average price of $107 a barrel for May.
The turnaround has been rapid. In early June, ships already had a significant increase as total flows had increased from a May low of 9.6 million bpd to about 12 million bpd, aided by ship-to-ship transfers in the Gulf of Oman.
The International Maritime Organization said it had been assured of security in order to allow hundreds of ships to pass through the Persian Gulf through Hormuz and the IEA projected UAE oil exports had returned to almost 85% of pre-conflict levels in the early June.
Washington's 60-Day Waiver
A major development of note was in Washington. The U.S. Treasury Department gave the green light to Iranian oil and petroleum product production, delivery and sales for 60 days and thus raised hopes for more global supply.
The timing lowered a major source of macroeconomic uncertainty and markets were “likely welcoming the fact that both the US and Iran signed it sooner than initially expected,” said Norihiro Yamaguchi, lead economist at Oxford Economics.
There has also been a decline in demand
The supply recovery is coinciding with a weakened demand. The US Energy Information Administration now projects global oil demand will shrink by an average of 1.1 million bpd in 2026, instead of rising by 1.2 million bpd as forecasted in February.
The price of North Sea Dated crude fell over $40 per barrel from May to mid-June, as demand slowed down and whispers grew that a US-Iran deal was in the offing.
Outlook Remains Contingent
The journey towards complete market normalisation is not smooth. Restoring a full recovery will not be quick — mines will need to be cleared from key shipping routes and supply chains will need to be normalised. Oil supply is projected to decline by 3.9 million bpd, to 102.4 million bpd, on average this year through 2026.
Some remaining doubts regarding Iran's nuclear ambitions and activities introduce additional uncertainty. Iranian authorities disputed a claim by US Vice President JD Vance that Tehran has agreed to let nuclear inspectors back in, a move traders are closely watching.
The question of whether the current move is a permanent shift in energy prices, or a prelude to an energy truce, will depend on the longevity of any negotiations that remain, which by all accounts are fragile.