SINGAPORE — Oil prices fell on Monday after President Donald Trump said an agreement with Iran had been reached and the United States would end its naval blockade on the country.
Pakistan, which has been mediating an end to the US-Iran war, announced the deal that President Trump said would see the reopening of the key Strait of Hormuz shipping route.
Trump posted late Sunday afternoon on social media that a deal with Iran “is now complete.” Iran also affirmed on Sunday evening that the memorandum of agreement was finalized with the US.
Brent crude, the global oil benchmark, was 4.8% lower at $83.18 (£61.89) a barrel, while US-traded oil was down 5.6% at $80.13.
If oil settles at that level, it will be the lowest price for crude since March 4, just a few days into the war.
Pakistan’s prime minister Shehbaz Sharif said an official signing ceremony would be held in Switzerland on Friday.
Iran’s Deputy Foreign Minister Kazem Gharibabadi confirmed in a phone call on state TV that a deal with the US had been finalized, while Trump posted on social media “let the oil flow!”.
Markets have cheered apparent progress, but the oil market still has significant work ahead to return the flow of crude to normal. The Strait of Hormuz needs to be de-mined, ships need to be able to freely flow in and out of the strait, Middle East production needs to come back online, emergency petroleum reserves need to be refilled, and damaged energy facilities need to be repaired.
Oil analysts widely believe oil prices will remain elevated for quite some time. Even though prices may fall initially, they’re widely expected to bounce back once demand rises again — and particularly when emergency stockpiles get refilled.
Vandana Hari from energy markets analysis firm Vanda Insights said a lack of detail on what has been agreed “is likely to inject unease and uncertainty into the market.”
This could mean a week of uncertainty and volatility for the oil market, she added.
The Strait of Hormuz had been effectively closed since shortly after the US and Israel launched airstrikes on Iran on February 28.
Tehran had threatened to attack vessels using the crucial waterway, through which around 20% of the world’s oil and liquefied natural gas (LNG) normally passes.
Global energy markets have been on a wild ride in recent months, with prices often rising or falling sharply in response to developments in the US-Israel war with Iran.
Brent crude, which was trading at around $70 a barrel before the conflict started, peaked at about $120 during the war.
Energy market experts have also warned that the movement of oil through the strait is unlikely to immediately return to pre-war levels.
Andrew Lipow from consulting company Lipow Oil Associates said mines would first need to cleared from the waterway, which could take from a few weeks to up to six months.
He also said there is a large backlog of tankers waiting to use the waterway and that restarting oil production and getting the loading of ships back to normal levels could take weeks.
Asian stock markets also rose on Monday as investors welcomed the deal.
Japan’s Nikkei 225 share index was 5.4% higher in morning trade while the Kospi in South Korea was up by more than 5.5%.
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.
Source: Saudi Gazette