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US Oil Update: Futures Extend Slide After US-Iran Peace Framework

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Crude oil futures plunged about 6% in midday trading on Tuesday, extending declines, after the US and Iran reached a preliminary agreement to end the Middle East conflict, reopen the Strait of Hormuz and ease the global energy crunch.

Front-month West Texas Intermediate crude futures plunged 6% to $75.88 per barrel, while Brent futures retreated by 5.3% to $78.75/bbl.

Erik Meyersson, chief EM Strategist at SEB Research, said that the US-Iran peace deal to be signed on Friday looks set to boost Hormuz passage and provide much-needed relief for energy markets.

President Trump said upon arrival in France on Monday that the peace deal with Iran has been signed, adding that the Strait will "completely reopen" on Friday, free of Iranian tolls. The US President said a formal signing ceremony would take place on Friday in Geneva.

Market participants expect a reopening of the strategic waterway to boost output from the Middle East and release millions of barrels of oil stored on tankers in the Persian Gulf.

Soojin Kim, research analyst at MUFG, said Brent would remain in the $80-90/bbl range in the near term as improving supply prospects offset still-tight inventories and lingering geopolitical risks.

The double blockade of Hormuz by the US and Iran has cut oil flows from the region, triggering the drawdown of commercial and strategic inventories.

Though market participants have welcomed the prospect of increased crude flows via the Hormuz, RBC Capital Markets analysts said that the operational challenges of reopening the Strait could take months to resolve.

Kpler analysts said about 118 laden tankers are trapped in strategic waterways. However, though the vessels could leave within 10-15 days, the analysts said they could deliver an early spike in transits without boosting regional production.

Meanwhile, market participants are still grappling with whether the Strait has been cleared of mines, whether Iran retains de facto operational control, and how any transit tolls would be structured and collected.

RBC Capital Markets analysts said the core MoU tentpoles remain unchanged from April and center on the lifting of the double blockade and the reopening of the Hormuz.

On the supply front, the US will reportedly also allow Iran to immediately begin selling oil and fuel under the MoU between the two sides, reached to end the conflict.

Trump said Russia should make peace with Ukraine, and that he would try to help, according to media reports. A settlement in the Ukrainian war could result in the lifting of some sanctions on Russia, allowing Moscow to export more crude.

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