SINGAPORE: Oil prices fall 4.1% for Brent and 4.7% for WTI, following confirmation from President Trump and Iran’s deputy foreign minister regarding a preliminary deal to conclude hostilities and ensure passage through the strategic strait, which is responsible for one-fifth of global oil and LNG transportation.
The price of oil fell to its lowest in six months on Monday after President Donald Trump and the deputy foreign minister of Iran made an announcement regarding the first steps in ending the conflict, as well as reopening the Strait of Hormuz, which accounts for about one-fifth of the total oil and liquefied natural gas production around the world. Oil prices fell in response to the news about the deal at the Strait of Hormuz.
Details of the Strait of Hormuz Deal
The price of Brent oil futures fell $3.58 or 4.10 percent, to trade at $83.75 per barrel. In addition, the US West Texas Intermediate crude oil futures price decreased by $4.01 or 4.72 percent, to trade at $80.87 per barrelv It is essential to highlight that both of these indicators fell by over 3 percent yesterday, which clearly shows that the news regarding the Strait of Hormuz deal was released while the price of oil continued to fall for two consecutive days. The US president confirmed that the memorandum of understanding would be signed in Switzerland on Friday.
On Sunday, Trump said that the Strait of Hormuz would be open “toll free,” and there would be no more US naval blockade of Iran’s ports. According to Iran’s semi-official Mehr news agency, the proposed deal requires the opening of the strait in 30 days according to an arrangement from Iran.
Why the risk premium is being unwound in such an aggressive manner
Here, Waterer has nailed down the essence of Monday’s event. The global economy has become deprived of millions of barrels per day of oil and gas production once the war blocked the Strait of Hormuz, which kept oil prices high for more than three months despite relatively weak demand. The Strait of Hormuz Oil Price deals with the disappearance of this supply factor from traders’ price considerations, leading to 4%-plus moves.
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How much oil must flow before prices stabilize?
Vivek Dhar, the commodities strategist for Commonwealth Bank of Australia, pointed out that flows from Hormuz only have to hit 60-70% of the previous pre-war volume levels to get the oil market back into pre-war oversupply mode, where it has been seen before to keep Brent oil at around $80 per barrel. This is important since it means prices can continue to move down without a complete return to pre-war shipping volumes.
Possible barriers to further falls
It is not the case that every analyst views this drop as a linear one. Tony Sycamore from the IG market pointed out that the uncertainty regarding the next 60 days of negotiation – especially about the Iranian nuclear program – makes it difficult to imagine the crude prices falling further. The other possible factor here is that countries known as E4, i.e., the United Kingdom, France, Germany, and Italy, have said that they are ready to ease sanctions on Iran because of their nuclear program progress.
Recovery of production is the next big thing to look out for
As far as diplomacy is concerned, the new focus is how fast the oil producers in the Middle East are able to start producing oil again following the destruction caused by the war, and if shipping resumes back in the region. What the Strait of Hormuz deal did was set the stage politically for such recovery, but the infrastructure itself will play a bigger role.
Nayab Fatima is a university graduate and an emerging media professional with a strong passion for journalism, research, and independent reporting. She specializes in developing well-researched, fact-based, and analytical news stories covering a wide range of sectors, with particular expertise in technology, telecommunications, aviation, and the automobile industry.
