Oil prices slipped to a three-month low on Monday after US President Donald Trump and Iran’s deputy foreign minister said they had reached an initial deal to end the war and to resume traffic through the Strait of Hormuz.
Brent crude futures fell $4.33 (R70.08), or nearly 5%, to $83.00 a barrel and US West Texas Intermediate was at $80.34, down $4.54, or 5.35%. Both contracts fell to their lowest levels since March 10 on Monday after tumbling more than 3% on Friday.
MOU to be signed on Friday
The US and Iran will sign a memorandum of understanding in Switzerland on Friday, said the prime minister of Pakistan, whose country has served as a mediator. Trump said on Sunday that the Strait of Hormuz would be open “toll free” and that a U.S. naval blockade of Iranian ports would also end.
Iran’s semi-official Mehr news agency said the draft deal called for reopening the Strait of Hormuz within 30 days under Iranian arrangements.
“It will take time for oil to approach the pre-crisis level of 20 million barrels per day sailing through this chokepoint. Estimates of the full resumption of traffic vary from weeks to months,” said Tamas Varga, analyst at PVM Oil Associates.
“Financial investors are, therefore, merely borrowing future physical supply, hence the current cheapening of oil prices. The slow resumption will possibly result in a supply deficit throughout 2026.”
Closure of Stait costly
The world has lost millions of barrels of oil and gas supply since the war closed the Strait of Hormuz, a chokepoint for a fifth of the world’s oil and liquefied natural gas supplies, for more than three months.
Investors are also watching cautiously how quickly Middle Eastern producers can resume oil production and exports following damage from the war and whether more ships will enter the region.
“The damage already done cannot be reversed overnight. This includes not only any physical damage to oil infrastructure but also the economic strain endured by oil-importing economies that have faced elevated energy costs for months,” said Priyanka Sachdeva, senior market analyst at Phillip Nova.
Iran’s deputy foreign minister, Kazem Gharibabadi, said a more expansive agreement would be negotiated during a 60-day ceasefire period.
Iran’s nuclear programme a sticking point
However, Israeli Defence Minister Israel Katz said the military would remain in security zones in Lebanon, Syria and Gaza indefinitely in order to protect the border and Israeli settlements. The fate of Iran’s nuclear programme, another thorny issue, will also be addressed in those later talks, sources previously told Reuters.
E4 nations, which include the UK, France, Germany and Italy, said on Sunday the countries were prepared to lift sanctions on Iran in response to steps on its nuclear programme.
Stocks and bonds rallied and the dollar fell in Asian trade on Monday after the US and Iran agreed to a peace deal to re-open the Strait of Hormuz and lift a US blockade on Iran.
US crude futures fell more than 4%, S&P 500 futures rose about 0.8% and the dollar was down broadly, lifting the yen to 159.7 per dollar and the euro to $1.1616.
‘Devil’s in the details’
Charu Chanana, the chief investment strategist from Singapore’s Saxo, said: ‘The peace framework is the clearest sign yet that both Washington and Iran want an off-ramp…but this is still a framework, not a final deal. The real test is Friday’s signing, the details around sanctions/nuclear concessions, and whether Israel actually respects Trump’s call to halt hostilities in Lebanon.”
Hiroyuki Ueno, the chief strategist at Sumitomo Mitsui Trust Asset Management, said: “The valuation for Japanese equities is still low but there is a caution for the Nikkei’s current level. The market was volatile last week and that was a sign of caution.
“So today’s gain is probably partly led by demand for short cover. There are some investors who must buy Japanese stocks today. But market players who are long on Japanese stocks would not scoop up the stocks at this high.”
Mashahito Sugawara, a senior strategist at Daiwa Securities, Tokyo, said: “Given the falling oil prices, the risk for accelerating inflation may weaken. Market players have been bracing for a hawkish stance from the BOJ, but the post-meeting comments from the BOJ’s Deputy Governor (Shinichi) Uchida may not be as hawkish as they had expected. That may weaken the yen after the press conference on Tuesday.”
Imre Speizer, the market strategist at Westpac Auckland said: “It’s positive for risk assets, positive for risky currencies, and negative for the US dollar.
“There’s still a few minor concerns – the Israeli skirmish with Lebanon remains a risk. And then you’ve got the signing date’s Friday, and that’s a long way off in this sort of environment. If it all goes according to plan…there’ll probably be one more leg to this set of mini rallies.
‘Good news for global economy’
“Inflation expectations might slip, but inflation itself is going to linger for some time. Because supply chains don’t suddenly get fixed, and oil back on tap is not immediate. “The Bank of Australia said: “It’s obviously good news for the global economy that the Strait of Hormuz will reopen. It has been our view, though, that it’s going to take some time for oil and gas flows to restart in full. Markets will be focused on how traffic is returning…and seeing how quickly production can come back online.
“It is our view that energy prices are not going to go back down to the levels that they were pre-conflict for quite some time…and it’s going to take a while for traffic to go back to normal as well.”
Mahjabeen Zaman, the head of FX Research, ANZ, Sydney said: “This good news has been expected for some time now, and markets have been inching, waiting, with some of the positive vibe already embedded in pricing.
‘Infrastructure has been damaged’
“Looking at cyclical FX, I think there is room for upside from where it is right now. You may see (oil) break $80 on just, you know, happy days today…but then maybe the market will realise that, oh, wait a minute, maybe the terms of the deal may not be as lucrative. We also think that oil prices will remain a little bit on the higher side only because infrastructure has been damaged.”
Chris Weston, the head of research at Pepperstone, Melbourne, said: “It looks credible, and it looks enough for the market to move on. We’re looking now at what Hormuz looks like in terms of the ramp-up of cargo and logistics through the channel, given there have been some structural changes (and) damage to refineries.
“I think there’s going to be a lot of other risk assets which are going to try to move on other factors, such as the ramp-up of demand, people are looking at earnings again and central bank expectations this week.
“I think the trade is short volatility here. And that’s going to allow risk to come on…a further decline in long-end bond yields would be certainly quite welcome for equity risk,” said Weston.
- Oil prices dropped to a three-month low after the US and Iran agreed to an initial peace deal to end the war and reopen the Strait of Hormuz, a key oil transit chokepoint.
- The US and Iran plan to sign a memorandum of understanding in Switzerland, with the Strait of Hormuz expected to reopen within 30 days under Iranian oversight.
- Despite the deal, experts warn a full resumption of oil flow could take weeks to months due to war damage and logistical challenges, possibly causing a supply deficit through 2026.
- The peace agreement boosted global stocks, lowered the dollar, and eased inflation concerns, though uncertainty remains regarding Israel’s military presence and Iran’s nuclear program.
- Analysts caution that while the deal is positive, oil prices are likely to remain elevated for some time, and markets will focus on the pace of traffic resumption and restoration of oil production.
