Oil slides as Trump’s Hormuz agreement lifts outlook for supply

[SINGAPORE] Oil fell as an interim US-Iran peace deal went into effect, putting the focus on how quickly transits through the Strait of Hormuz can be ramped up as Persian Gulf producers restart shut-in fields.

Brent sank towards US$78 a barrel after a modest gain on Wednesday (Jun 17), while West Texas Intermediate was near US$76. US President Donald Trump said that he had signed the deal, which envisions a rapid reopening of the critical waterway.

US oil sanctions must now be lifted immediately, according to Iranian Foreign Ministry spokesperson Esmail Baghaei. “Iran must be able to sell its oil, shipping and insurance must not face any issues, and the revenues from oil sales must also be received,” he said.

Crude has shed almost all of the gains seen during the conflict, which erupted in February when the US and Israel attacked Iran to curb its nuclear program. Teheran responded by blocking the waterway, which used to carry about a fifth of global oil supply in peacetime. The US also subsequently blockaded the conduit in a bid to ramp up the pressure against Teheran.

“The easy part was reaching an agreement, the harder part is determining how much of the disruption from the past few months becomes permanent,” said Haris Khurshid, chief investment officer of Karobaar Capital.

Goldman Sachs said in a note earlier this week that it now assumes that Persian Gulf exports will normalise at pre-war levels by the end of next month, compared with an outlook for the end of August previously.

“Markets tend to assume a reopening means a reset,” said Khurshid. “While really some of the changes made during the disruption may stick around longer than people expect.”

Ahead of the deal’s signing, which ushers in a 60-day period of additional talks on unresolved issues, the oil and shipping industry remained largely in wait-and-see mode, although a handful of vessels began rerouting towards the Middle East, while Iranian tankers laden with oil moved out.

Shipbrokers and owners reported some tentative inquiries about hiring vessels to collect oil from ports across the region, although it’s not clear whether any new deals have been struck. Iraq, the region’s second-largest producer before the war, said it was taking steps to increase exports.

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Oil falls under US$80 as US-Iran deal set to add supply

While oil prices have eased, pressure on inventories remains acute. Stockpiles at Cushing, the largest US commercial storage hub, have sunk to about 20 million barrels. That’s a level traders consider an operational minimum.

At the same time, petroleum products have followed crude’s path lower. Average nationwide petrol prices in the US have dropped back to US$4.025 a gallon, compared with a high of US$4.564 last month, according to daily figures from the American Automobile Association.

On Wednesday, President Trump signalled that the risk of a major economic crisis had played a key role in his decision to call off the war. Military escalation “could have caused an international depression”, he said.

The US leader “really does want, going into the midterms, lower petrol prices”, said Carolyn Kissane, associate dean at the Center for Global Affairs at New York University, referring to the elections in November. “He’s willing to accept a deal kind of at all costs.” BLOOMBERG