Oil prices have fallen more than 5% and global stock markets soared after the US and Iran announced a framework deal to end their conflict, with Donald Trump confirming the reopening of the Strait of Hormuz – a waterway through which about 20% of the world's oil and liquefied natural gas normally passes.
Brent crude, the global oil benchmark, dropped to $82.84 a barrel, while wholesale gas prices fell about 6%. The slump from a peak of $126 a barrel during the war could mean the global economy avoids the worst-case consequences predicted in the early days of the conflict, analysts said. Before the war, Brent was trading at around $70 a barrel.
“Oil prices tumble 5% and markets rally as US and Iran agree framework deal to reopen Strait of Hormuz.”
The 11th-hour deal emerged weeks before the oil market was forecast to enter a “red zone” in which soaring summer demand during the travel season was expected to collide with fast-depleting crude stockpiles. But even as markets exhaled, uncertainty remained: a return to pre-crisis normalcy is months away and relies on the cooperation of the Iranian regime with the White House.
Iran’s deputy foreign minister Kazem Gharibabadi confirmed in a phone call on state TV that a deal with the US had been finalised, while Trump posted on social media “let the oil flow!”. The US and Iran are due to sign the “great deal” on Friday, according to Trump, before the strait is reopened “for purposes of mine removal” during a 60-day negotiation over the terms of Iran’s nuclear phaseout. Pakistan, which has been mediating the talks, said an official signing ceremony would be held on Friday, 19 June in Switzerland.
Asian stock markets surged on Monday, with Japan’s Nikkei 225 closing 5% higher and South Korea’s Kospi ending up 5.2%. The region was hit particularly hard by higher energy prices as it is heavily reliant on the Middle East for its oil and LNG supplies. In Europe, Germany’s Dax rose 1.2% and France’s Cac 40 added 0.7%, while London’s FTSE 100 slipped 0.4% as shares in energy giants BP and Shell dropped on the lower oil price. US markets saw a strong start, with the Dow Jones up 1% and the S&P 500 1.6% higher in early trading.
But Vandana Hari from energy markets analysis firm Vanda Insights said a lack of detail on what has been agreed was “likely to inject unease and uncertainty into the market”, potentially meaning a week of volatility for oil. Market observers believe it could be July before the trade route that once carried 20% of the world’s oil and LNG is fully operational.
Bjarne Schieldrop, the chief commodities analyst at SEB, said Trump had to “sell this at home as a victory”, with midterm elections approaching. When the deal is finalised, US consumers can expect “lower gasoline price and maybe US republicans survive the midterm elections”. For Iran, a gradual reopening “is tactically preferable” in preventing global governments from restocking their crude stores too quickly and allowing Tehran to maintain political leverage.
Despite the sharp fall, prices may now remain between $80 and $90 a barrel over the rest of the year as buyers race to refill heavily depleted emergency crude stockpiles, analysts predicted. Matt Britzman, senior equity analyst at Hargreaves Lansdown, said global equity markets were “firmly on the front foot” on Monday, adding the framework deal had “given investors a clear re…”. Meanwhile, the deal has increased the likelihood that the US central bank will leave interest rates on hold when the Federal Reserve meets on Wednesday.