Oil Prices Drop as US-Iran Peace Deal Signals Strait of Hormuz Reopening
After over 100 days of significant disruption to global energy supplies, the oil and gas markets have shown signs of relief. Following confirmation from Donald Trump that a US-Iran peace agreement would lead to the reopening of the Strait of Hormuz for tankers transporting millions of barrels of oil and gas, Brent crude prices fell to a three-month low. Wholesale gas prices also declined by approximately 6%.
Despite this decline, the international oil benchmark remains well above the $69 per barrel average recorded last year. The recent price drop could help the global economy avoid the severe consequences initially anticipated at the onset of the Iran conflict.
Market Dynamics and Uncertainty Post-Deal
The last-minute agreement comes just weeks before the oil market was expected to face a critical period, where rising summer demand during the travel season would coincide with rapidly depleting crude stockpiles. Although the market has eased after weeks of unprecedented disruption, uncertainty persists. A return to pre-crisis conditions is projected to take several months and depends heavily on cooperation between the Iranian regime and the White House.
In the United States, where Trump faces midterm elections later this year, elevated road fuel prices during the summer driving season posed a significant political risk to his administration.
“Trump has to sell this at home as a victory,” said Bjarne Schieldrop, chief commodities analyst at SEB. When the deal is implemented, US consumers can expect “lower gasoline price and maybe US republicans survive the midterm elections,” he added.
For Iran, a gradual reopening is also strategically advantageous. Schieldrop noted that it helps prevent global governments from rapidly restocking their crude reserves, thereby allowing Tehran to maintain political leverage during ongoing negotiations with the US.
Details of the Agreement and Market Implications
The US and Iran are scheduled to sign the "great deal" on Friday, according to Trump. The Strait of Hormuz will be reopened "for purposes of mine removal" during a 60-day negotiation period concerning the terms of Iran’s nuclear phaseout.
Despite the sharp decline in global oil and gas prices following the announcement, prices may remain between $80 and $90 per barrel for the remainder of the year. This is due to buyers rushing to replenish heavily depleted emergency crude stockpiles.
Market analysts anticipate that it could be July before the trade route, which previously transported one-fifth of the world’s oil and gas, begins contributing to the Gulf’s recovery toward pre-crisis export levels. Full restoration of oil flows to prewar volumes is expected by the end of the year.
“Even if ships now have safe passage, tankers are in the wrong place, oil production and refining facilities need to get up to full capacity, and questions over the cost and availability of insurance for ships traversing the strait will remain,” said Neil Shearing, chief economist at Capital Economics.
Shearing estimates that about 80% of crude flows could resume by the end of the third quarter. However, gas exports may take longer to recover due to damage caused by Iranian drone strikes on Qatar’s gas processing facilities during the conflict. These facilities are vulnerable to the economic impact of global gas prices.
Impact of Drone Strikes on Gas Production
The drone strikes forced QatarEnergy, the world’s largest liquefied natural gas (LNG) producer, to halt production, effectively eliminating 20% of the world’s LNG supply at once. This disruption could result in years before QatarEnergy returns to full operational capacity, contributing to sustained higher prices as buyers compete for cargoes from a reduced pool of gas producers.
Challenges in Restoring Gulf Oil Exports
Analysts at Rystad Energy suggest that Gulf oil exports may not return to pre-crisis levels until next year. This delay is attributed to the difficulties in restarting aging oilfields in Iraq and Kuwait, which were shut down within weeks of the Strait of Hormuz closure as regional storage facilities reached capacity.
Shearing stated, “Even if the deal reopens the strait immediately, it will not prevent inflation from rising a bit further in the near term, nor will it avoid some economic damage.”
Nevertheless, he forecasts that a slightly improved outlook could mean the global economy avoids recession, instead experiencing slower growth than previously expected in the third quarter. Global GDP growth is projected to recover to its pre-conflict rate of just over 3% by late 2026 and into 2027.
