Crude oil prices fell over 4% to their lowest levels in more than three months on Sunday after the United States and Iran agreed to a ceasefire extension that could lead to the reopening of the Strait of Hormuz.
The global benchmark Brent crude dropped 3.6% to $84.21 per barrel. It initially fell even more steeply before reversing some of the decline. The drop reflects growing market optimism that the worst of the energy supply shock may be coming to an end.
Severe restrictions on oil traffic through the Strait of Hormuz since the US-Israeli war with Iran began in late February have created an unprecedented energy shock that has been a drag on the global economy. The strait normally handles about one-fifth of the world’s oil supply.
The Deal
The memorandum of understanding between Washington and Tehran would mark the biggest diplomatic breakthrough of the war and buy time to settle the hardest questions over Iran’s nuclear program. The ceasefire extension provides a window for further negotiations while easing the immediate pressure on global oil markets.
Average US gasoline prices soared to a high of roughly $4.56 per gallon in May but have retreated in recent weeks and now average $4.07, according to AAA. The decline at the pump reflects the same market forces driving down crude prices.
What’s Next
The disrupted market will take months to fully untangle. Even with a ceasefire extension and the potential reopening of the Strait of Hormuz, the global supply chain has been severely damaged. Tanker routes need to be reestablished. Insurance rates need to normalize. Refiners need to adjust to new supply patterns.
But the apparent deal could enable a major increase in tanker transit in the coming weeks. And for consumers still paying more than $4 per gallon at the pump, any relief is welcome.
Gas prices won’t return to pre-war levels anytime soon, analysts warn. The war has caused lasting damage to global energy infrastructure and supply chains. But the downward trend in oil prices is a clear signal that markets believe the worst may be over.
The Bottom Line
Oil prices fell over 4% to their lowest levels in more than three months after the US and Iran agreed to a ceasefire extension that could lead to the reopening of the Strait of Hormuz. Brent crude dropped to $84.21 per barrel. US gasoline prices have retreated from a May high of $4.56 to $4.07 per gallon. The memorandum of understanding marks the biggest diplomatic breakthrough of the war, but the disrupted market will take months to fully untangle.
