Oil prices extended their decline on Thursday, falling to their lowest levels since the early days of the Iran conflict, after a preliminary agreement between the United States and Iran raised expectations of increased crude supplies and the reopening of a key global shipping route.
Brent crude futures dropped $1.59, or 2%, to $77.96 a barrel by 0811 GMT, while U.S. West Texas Intermediate crude fell $1.83, or 2.38%, to $74.96 a barrel.
The decline pushed Brent to its weakest level since March 2, the first trading session after the initial U.S.-Israeli strikes on Iran, while WTI reached its lowest point since March 4.
Markets Price in Return of Iranian Oil
Analysts said traders are increasingly factoring in the prospect of Iranian crude returning to international markets sooner than previously expected.
“The sell-off extended as energy markets continued to aggressively price in a faster-than-expected return of Iranian barrels following the recent U.S.-Iran memorandum of understanding,” IG market analyst Tony Sycamore said in a note.
The agreement establishes a 60-day negotiating period and includes provisions allowing toll-free transit through the Strait of Hormuz, one of the world’s most important oil and gas transport corridors.
Under the framework, shipping traffic through the waterway is expected to return to full operating capacity within 30 days.
Major Issues Still Await Resolution
While the accord has been welcomed by markets, several key challenges remain unresolved.
The preliminary deal postpones negotiations on sensitive topics such as Iran’s nuclear programme and also requires the United States and its partners to develop a $300 billion recovery package to support Iran’s economic reconstruction.
Despite those uncertainties, investors have responded positively to the prospect of reduced supply disruptions.
Analysts Expect Gradual Recovery in Exports
Market observers anticipate that energy flows through the Strait of Hormuz will recover progressively rather than immediately.
Goldman Sachs expects Gulf energy exports to return to pre-war levels by the end of July, with crude production normalising by October.
The bank estimates that restoring exports could involve an increase of roughly 13 million barrels per day in flows through Hormuz compared with current levels, bringing activity back to around 70% of pre-conflict capacity.
Kpler analyst Matt Stanley cautioned that conditions have not yet fully stabilised.
“Whilst it does seem the worst is behind us, things are quite a long way off from being normal,” Stanley said, adding that much of the conflict-related risk premium has already been removed from prices.
Prices Seen Easing Rather Than Collapsing
Several industry experts believe oil prices could continue to soften but are unlikely to experience a dramatic collapse.
International Monetary Fund Managing Director Kristalina Georgieva said countries are likely to rebuild strategic reserves as shipping routes normalise, helping support demand.
Meanwhile, International Energy Agency Executive Director Fatih Birol stressed the importance of concluding negotiations within the agreed timeframe, having previously warned that the global economy would enter a “red zone” if the Strait of Hormuz remained closed beyond the end of June.
Fed Expectations Add Pressure to Crude
Oil markets also faced pressure from shifting expectations around U.S. monetary policy.
Investors have increased bets that the Federal Reserve could raise interest rates later this year to combat inflation, a move that could slow economic activity and weigh on future energy demand.
The prospect of tighter financial conditions added another headwind for crude prices, contributing to Thursday’s broad decline across energy markets.