Oil drops to fresh three-month low as markets weigh US-Iran peace deal

Oil prices fell nearly 5% on Monday to their lowest since March 4 after President Donald Trump announced a deal to end the Iran war.  (EPA Images pic)

LONDON: Oil prices slid to fresh three-month lows on Tuesday as markets weighed prospects for a resumption of supplies through the Strait of Hormuz alongside weaker physical demand and scant details on a preliminary deal to end the Iran war.

Brent crude futures LCOc1 were down US$1.44, or 1.7%, at US$81.73 a barrel, the lowest since March 10, at 0906 GMT.

US West Texas Intermediate CLc1 was down US$1.55, or 1.9%, at US$79.20 a barrel, also the lowest since March 10.

Oil prices had already dropped nearly 5% on Monday to their lowest close since March 4 after US President Donald Trump said a memorandum of understanding had been signed to end the US-Israeli war with Iran, though full details have not been released.

Iranian Foreign Minister Abbas Araqchi said on Tuesday Iran and the US would start a new round of talks in Switzerland on Friday to reach a final agreement after the start of an interim deal.

He warned that any Israeli attack on Lebanon or continued presence on Lebanese territory would breach the interim agreement.

The conflict led to the closure of the Strait of Hormuz, which typically carries about one-fifth of global oil supplies.

Some analysts expect flows through the strait to resume soon, adding to downward pressure from already soft physical markets.

Goldman Sachs lowered its fourth-quarter Brent forecast to US$80 a barrel from US$90 and cut its 2027 average estimate to US$75 from US$80, saying it now assumes Gulf exports return to pre-war levels by the end of July rather than late August.

A range of indicators has pointed to weakening physical oil markets in recent weeks, Morgan Stanley analysts said in a client note.

China’s crude imports slumped 29% in May to their lowest in eight years, extending a sharp decline for the world’s largest importer, with shipments of Saudi crude also expected to fall in July.

Early indications suggest the US-Iran deal would reopen the blockaded Strait of Hormuz and extend a ceasefire for 60 days, buying time for negotiations on issues including Iran’s nuclear programme.

But with details still unclear and a permanent truce yet to be secured, analysts say volatility risks remain.

Suvro Sarkar, the head of DBS Bank’s energy research, said the deal’s first phase – encompassing the Geneva signing of the ceasefire extension – was easy.

The second phase – the reopening of the Strait of Hormuz and winding down the US naval blockade on Iranian ports and vessels – would be watched closely by markets, he added.

“Anything other than a clean simultaneous unlock will mean renewed volatility in oil prices,” Sarkar said. “Given the trust deficit so far, it will be interesting to see how this plays out over the next couple of weeks.”