Oil prices tumble as US-Iran deal hopes lift Hormuz reopening outlook
Crude benchmarks sank as reports of a possible US-Iran memorandum fuelled hopes for Hormuz shipping, while analysts cautioned that flows may take weeks to normalise
- Oil prices fell sharply to their lowest levels in two weeks, with Brent crude dropping by 7.83% and U.S. WTI crude by 7.03%.
- The decline was driven by growing optimism for a peace arrangement between the United States and Iran, with reports suggesting a deal is close.
- A potential deal has raised expectations for the reopening of the Strait of Hormuz, a critical waterway whose closure had previously cut oil supply and increased prices.
Oil prices slid to their lowest levels in two weeks on Wednesday (May 6), as expectations strengthened that the Middle East war could be moving towards an end after reports suggested the United States and Iran were close to an initial peace arrangement.
Brent crude futures closed down US$8.60, or 7.83%, at US$101.27 a barrel, after briefly falling below US$100 for the first time since April 22. US West Texas Intermediate crude dropped US$7.19, or 7.03%, to US$95.08.
A source from mediator Pakistan said Washington and Tehran were nearing an agreement on a one-page memorandum of understanding. Iran said on Wednesday it was assessing a new US proposal, while an Iranian foreign ministry spokesperson, quoted by Iran’s ISNA news agency, said Tehran would send its reply soon through Pakistan.
Iran had earlier said it would accept only a fair and comprehensive agreement. Axios reported that the US expected Iranian responses on several key issues within 48 hours, citing sources who described the talks as the closest the two sides had come to a deal since the war began.
“There’s a growing sense that the chance of the Strait of Hormuz reopening is greater, regardless of whether we get a lasting peace deal with Iran or not,” said Phil Flynn, senior analyst with Price Futures Group.
Both major crude contracts touched two-week lows. Brent fell as far as US$96.75 during the session before trimming losses after US President Donald Trump said it was “too soon” to consider face-to-face talks with Tehran. Prices also steadied after a senior Iranian parliament member said the US proposal looked more like a wish list than reality.
The US military said on Monday it had destroyed several Iranian small boats as part of efforts to help stranded vessels leave the Strait of Hormuz.
“A deal announcement would move futures further immediately, in fact, even the potential of a deal is already triggering a decline in oil prices,” said Paola Rodriguez-Masiu, chief oil analyst at Rystad Energy.
She warned, however, that global oil flows would not return to normal immediately, even if the strait reopened. “The six-to-eight-week lag between credible access conditions and real flow normalisation is not a conservative estimate; it is a structural feature of how shipping markets work,” Rodriguez-Masiu said.
Since the war began in February, halted marine traffic through the Strait of Hormuz has cut crude supply and pushed prices higher. Brent last week traded at its strongest level since March 2022.
The Strait’s closure has also drawn down global oil and fuel inventories, as refineries have tried to make up for production shortfalls.
“A partial deal may be enough for Strait of Hormuz shipping to gradually normalise,” said Raymond James analyst Pavel Molchanov. He added that, if the price decline holds, US consumers could see pump prices ease over the next one to two weeks.
US crude and fuel inventories continued to fall last week, the Energy Information Administration said on Wednesday, as countries worldwide moved to fill supply gaps caused by the Middle East conflict.
Crude stocks declined by 2.3 million barrels to 457.2 million barrels last week, the EIA said. Analysts in a Reuters poll had expected a larger draw of 3.3 million barrels.
Reuters
