Oil prices extended losses on Tuesday, as markets weighed prospects for a resumption of supply through the key Strait of Hormuz against shaky physical market drivers and a lack of details from a preliminary deal to end the Iran war.
In morning trade, Brent crude futures were down 0.5% at $82.72 a barrel, while US West Texas Intermediate was down 0.3%, at $80.51 a barrel.
Trump’s MOU announcement
On Monday, oil prices fell nearly 5% to their lowest close since March 4, after US President Donald Trump said a memorandum of understanding was signed to end the US-Israeli war with Iran, though full details have not been made public.
The hostilities led to the closure of the Strait of Hormuz that typically carried one-fifth of the world’s oil supply before the conflict.
Some analysts expect a resumption of supply soon via the Strait, with other factors weighing down physical market prices.
“From here, it likely takes several weeks for tanker flow to be restored,” Morgan Stanley analysts said in a client note.
“We see 50% of production back by September, and 80% by December, slightly faster than before.”
Weakness forecast
A broad range of indicators had signalled weakness in physical oil markets in recent weeks, they added.
“High US exports and low China imports are the key drivers (and) in the short term (i.e. next weeks) they do not seem to come to an end just yet.”
China’s crude imports slumped 29% in May to their lowest in eight years, extending a dramatic decline for the world’s largest importer, with its liftings of Saudi Arabian crude expected to also fall in July.
Early indications are that the US-Iran deal would reopen the blockaded Strait of Hormuz and extend a ceasefire for 60 days, allowing negotiators to tackle difficult issues such as the future of Iran’s nuclear programme.
‘An important step’
On Monday, Iranian President Masoud Pezeshkian called the U.S.-Iran pact an “important step” toward stopping the fighting but cautioned a final agreement for a lasting truce “has yet to take shape”.
But with full details yet to emerge and a permanent truce still to be reached, overall price weakness is limited.
Suvro Sarkar, the head of DBS Bank’s energy research, said the deal’s first phase, encompassing the Geneva signing of an extension of the 60-day ceasefire, was easy, would buy time and kick the “nuclear can” down the road.
But the second phase, to be watched most closely by markets for its physical impact, is the phased reopening of the Strait of Hormuz and the wind-down of the U.S. naval blockade on Iranian ports and vessels, he added.
“Anything other than a clean simultaneous unlock will mean renewed volatility in oil prices,” Sarkar said. “Given the trust deficit so far, it will be interesting to see how this plays out over the next couple of weeks.”
On Monday, a senior Iranian official said Iran would freeze its nuclear activity until a final agreement, and refrain from further uranium enrichment or expansion of nuclear facilities.
- Oil prices fell further as markets considered the potential reopening of the Strait of Hormuz amid weak physical market factors and unclear details from a preliminary US-Iran war-end deal.
- Brent crude dropped 0.5% to $82.72 per barrel and US West Texas Intermediate fell 0.3% to $80.51 per barrel on Tuesday.
- The initial US-Iran memorandum of understanding announced by President Trump raised hopes for ending the conflict that had closed the Strait of Hormuz, which handles about 20% of global oil supply.
- Analysts expect a gradual restoration of tanker flows through the Strait, projecting 50% supply return by September and 80% by December, but note ongoing weakness due to high US exports and low Chinese imports.
- Uncertainty remains, as the ceasefire extension is only for 60 days, a permanent truce is not finalized, and any delays in fully reopening the Strait of Hormuz could cause renewed oil price volatility.
