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Oil Prices Slump as Iran and the United States Agree to a Truce, Reopening the Strait of Hormuz

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Oil traded sharply lower early Monday after the United States and Iran reached a truce in the war that has blocked off the Strait of Hormuz, the chokepoint for a fifth of the daily oil demand supplied by Persian Gulf nations.

West Texas Intermediate crude oil for July delivery was last seen down US$4.36 to US$80.52 per barrel, the lowest since March 4, while August Brent oil down US$4.07 to US$83.26.

In a deal brokered by Pakistan, the United States and Iran on Sunday reached a memorandum of understanding to end the war launched by the U.S. and Israel on Feb. 28. According to the Wall Street Journal, the deal will see the Strait reopened on Friday, releasing tankers trapped in the Gulf and freeing up oil exports from the region. A final deal is expected to take up to two months to reach.

The war has forced importing countries to draw down stockpiles, depleting global inventories that had been swelled by over-production prior to the start of the war. Iranian attacks on its regional neighbors damaged crucial oil infrastructure and shut in producing producing oil fields, which will take at least months to restore pre-war output, likely keeping prices elevated for months.

"Whether prices, currently around US$13 above pre-war levels, can fall further will depend on several factors, including the pace at which commercial and strategic stockpiles are replenished, how quickly shut-in production can be brought back online, and the extent of any lasting demand destruction caused by a prolonged period of elevated energy prices. The speed at which supply chains normalise and export flows recover will also play a key role in determining how much of the geopolitical risk premium remains embedded in the market," Saxo Bank noted.

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