Oil Prices Fall After Agreement Between America and Iran and Opening of Hormuz

SadaNews - Oil prices dropped after U.S. President Donald Trump announced an agreement with Iran that ends the war in the Middle East, potentially allowing for the reopening of the Strait of Hormuz.

Brent crude fell by about 4% to below $84 per barrel, after closing last week at its lowest level in over three months, while West Texas Intermediate was near $81. The U.S. President stated in a social media post that he permits "opening the Strait of Hormuz without transit fees," as well as lifting the blockade on Iranian ports.

Trump said: "Oh ships of the world, start your engines." He added: "Let the oil flow!".

Agreement Signed Between America and Iran in Switzerland

Iranian Deputy Foreign Minister Kazem Gharib Abadi confirmed that an agreement has been reached, stating that the text will be published following the signing ceremony in Switzerland. U.S. Vice President J.D. Vance expressed that he intends to "definitely" attend the ceremony, and Trump may also go.

Global energy markets have been trapped by the war since it erupted in late February, when the U.S. and Israel attacked Iran to curb its nuclear program. Tehran's response included strikes across the Arabian Gulf and the closing of Hormuz, which during peacetime transports about one-fifth of global oil flows. Separately, U.S. forces imposed their own blockade on ships linked to Iran.

Anticipated Relief for Energy and Shipping Sectors

After oil prices soared in the early stages of the conflict, they retreated in recent weeks due to repeated signals that Washington and Tehran were close to reaching an agreement, as well as indications of resuming some crude flows through the strait. Additionally, economies of developed countries resorted to emergency crude reserves, and some major importers, notably China, reduced their imports.

Although the agreement would be a significant breakthrough for energy producers in the Arabian Gulf and the global shipping sector, as well as consumers, multiple obstacles remain before traffic through the vital Hormuz corridor can fully resume. These obstacles include the clearance of naval mines, as well as clarity regarding Tehran's desire to exert more control over transiting ships.

Mine Hazards

Chris Weston, Head of Research at "Pepperstone Group," said: "We still need to understand what the agreement means for the market." He added: "Even with expectations of the strait opening on Friday, there may still be mines, and insurance companies may impose high rates."

Nevertheless, in a sign of changing market dynamics, the spot price spread for Brent crude, which is the difference between the prices of the two nearest contracts, narrowed to about one dollar per barrel in a backwardation structure. Although this still signifies a supportive bullish pattern, where the price of the nearest contract is higher than the next one, it has decreased from a gap exceeding $12 in April.

Anticipation of Resuming Halted Oil Production

Traders will be looking for signs of potential resumption of crude production from the Arabian Gulf fields that were halted during the conflict. Producers warned that fully restoring supplies could take months, considering the technical and geological challenges, as well as the damage to infrastructure.

Furthermore, strategic and commercial oil and product inventories will need to be replenished after being drawn down at a record pace.

Weston from "Pepperstone" said: "The structural gaps left by this war will take time to fill."

European natural gas futures also fell, dropping by as much as 5.8%.