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Crude Oil Prices Could Fall Another $5 to $10 Per Barrel After US-Iran Sign Peace Deal, Sparta Says

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Oil markets are likely to experience a "knee-jerk" selloff following the expected signing of a US-Iran memorandum of understanding on Friday, according to Neil Crosby, Head of Research at Sparta Commodities, who expects traders to rapidly unwind geopolitical risk premiums.

In a note shared withon Wednesday, Crosby expressed optimism about the agreement going through, noting that it was a strong deal for Tehran, with plenty of concessions being made by Washington.

While crude oil prices have already come under pressure over the past week, on the mere news of a potential deal between the two sides, Crosby expects another $5 to $10 per barrel downside when it actually gets signed.

However, after this, Crosby argued that supply and demand fundamentals would take over, which have been largely ignored thus far, as markets remain fixated on the peace process. He said that crude markets may have already entered into oversold territory.

Once the initial market reaction fades, attention is expected to shift back toward physical shipping conditions in the Arabian Gulf, global demand trends, US export volumes, and Chinese crude imports.

He also warned that expectations for a swift recovery in Hormuz shipping activity may be overly optimistic, saying that there was a 50% chance that flows through the strategically crucial Strait "won't normalise for some time."

This was attributed to shipowners continuing to remain wary, as insurers are yet to become fully comfortable with the security environment, with mines and geopolitical uncertainties continuing to persist across the crucial waterways.

The note also highlighted that refined products could take longer to normalize than crude, because "refineries are slower to spool back up and supply chains take longer to rebalance." Crosby noted that this segment had a greater chance of witnessing a spike in pricing, even though crude remained the most oversold.

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