Oil prices fell sharply in early Asian trade on Monday after Pakistan announced a US-Iran deal that President Donald Trump said would reopen the Strait of Hormuz, a waterway through which around 20% of the world's oil and liquefied natural gas normally passes.
Brent crude, the global benchmark, dropped 4% to $83.81 a barrel, while US-traded oil was down 4.7% at $80.89. The strait had been effectively closed since shortly after the US and Israel launched airstrikes on Iran on 28 February, with Tehran threatening to attack vessels using the crucial route.
“Oil prices slide 4% after Pakistan announces US-Iran deal to reopen Strait of Hormuz, but analysts warn of uncertainty.”
Under the agreement, which will extend a ceasefire by 60 days, the strait will be reopened and nuclear negotiations will begin, according to a summary of the deal. Pakistan's prime minister, Shehbaz Sharif, said an official signing ceremony would be on Friday, 19 June in Switzerland. Iran's deputy foreign minister, Kazem Gharibabadi, confirmed to state TV that a deal with the US had been finalised. Trump posted on social media to “let the oil flow!”.
But Vandana Hari from energy markets analysis firm Vanda Insights said a lack of detail on what had been agreed “is likely to inject unease and uncertainty into the market”. This could mean a week of uncertainty and volatility, she added. Andrew Lipow from consulting company Lipow Oil Associates warned that mines would first need to be cleared from the waterway, a process that could take from a few weeks to up to six months. He also noted a large backlog of tankers waiting to use the waterway and said restarting oil production and loading ships could take weeks.
The timing of the signing has been thrown into confusion. Trump said on Saturday that the deal would be finalised on Sunday, but Tehran cast doubt on that timeframe. Pakistan earlier said the deal was “likely expected” to be finalised within 24 hours. Despite the uncertainty, Asian stock markets rose on Monday as investors welcomed the agreement. Japan's Nikkei 225 was 4.3% higher and South Korea's Kospi gained more than 5%. The region, heavily reliant on Middle East oil and LNG, had been hit particularly hard by the conflict-driven spike in energy prices. Brent crude, trading around $70 a barrel before the war, peaked at about $120 during the conflict.