Oil prices plunged early Wednesday following reports the United States and Iran are close to an agreement to end their war, offering the possibility the Strait of Hormuz could soon reopen.
West Texas Intermediate crude oil was last seen down $8.63 to US$93.64 per barrel after touching US$88.66 in Asian trade, while July Brent oil was down $8.64 to US$101.23.
The drop came as Axios overnight reported the two countries were close to a negotiated deal to end hostilities, which was later confirmed by U.S. President Trump. In a social media post, Trump said the war "will be at an end" and the Strait of Hormuz will reopen to traffic if Iran agrees to a U.S. peace proposal, while threatening to resume bombing if its terms are rejected.
Citing Iran's state media, Reuters reported Iran's Islamic Revolutionary Guard Corps is claiming the Strait, the chokepoint for exports from Persian Gulf nations supplying 20% of daily oil demand, could reopen if a deal is reached.
Oil prices have climbed by more than half since Iran closed the Strait when the war began on Feb. 28, trapping exports of oil, LNG, fertilizers and other commodities in the Persian Gulf. However an end to the war is unlikely to see a quick return to normal. Iranian attacks on oil and gas infrastructure in neighboring countries and restarting production from shut in oilfields will limit a quick return to pre-war operating levels.
"If Hormuz were to be reopened, it would take an additional seven months at minimum to fully restore upstream production, assuming no permanent damage and supply chains operate smoothly. A recovery could take longer if there is damage to ports or other transport and loading infrastructure," S&P Global Energy noted.
A big drop in U.S. oil inventories limited oil's retreat Wednesday. In its weekly survey, the American Petroleum Institute reported domestic oil stocks dropped by 8.1-million barrels last week, well above consensus estimate for a 2.8-million draw, according to Investing.com. The Energy Information Administration will release official inventory data later Wednesday morning.