Oil Prices Plummet to 6-Week Low Amid Speculation of US-Iran Conflict Resolution

Oil Prices Plummet as US and Iran Agree to Extend Ceasefire

Oil prices sank to a six-week low on optimism that the Strait of Hormuz may soon reopen after the US and Iran tentatively agreed to extend a ceasefire. West Texas Intermediate (WTI) fell nearly 2% to settle around $87 a barrel, while global benchmark Brent settled near $92. The development comes as President Donald Trump said he will make a "final determination" on a preliminary deal to prolong the truce with Iran.

According to a person with knowledge of the matter, the agreement would extend the current truce by 60 days, during which Iran and the US would discuss the future of Tehran's nuclear program. However, Iran's Foreign Ministry has stated that no final understanding has been reached yet, with message exchanges between the two countries continuing.

The potential reopening of the Strait of Hormuz has been a major factor in the recent decline in oil prices. Crude has weakened in May on speculation that some form of accord would be reached, although the warring parties have hailed progress before, only for the stalemate to drag on. Several vessels transiting through the strait have been attacked in recent days, underscoring the "very real" risks that remain for shipowners in the Persian Gulf.

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Chevron Corp. Chief Executive Officer Mike Wirth highlighted the risks still present in the region, stating that "there still has been kinetic activity this week, some of which has been reported in the media — some of which has not." However, Wirth added that oil traders seem to be betting that the conflict is nearing a resolution, keeping price gains muted.

Despite the potential reopening of the Strait of Hormuz, multiple hurdles stand to impede the resumption of oil flows. Among them, mines in the Hormuz waterway must be removed, shut-in fields may take months to restart, and damage to energy infrastructure from drone and missile strikes needs to be repaired. In addition, vessels would take weeks to reach importing nations.

The data this week highlighted growing tightness in the US as the crisis dragged on. Distillate stockpiles sank to the lowest in more than two decades, and holdings of crude at the Cushing, Oklahoma, hub fell for a fifth week to 23 million barrels, pushing them closer to the 20-million-barrel mark that's generally seen as the minimum operating level.

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Dennis Kissler, head of energy trading at BOK Financial Securities Inc., stated that "Iran will have to abide by all agreements, and that in itself is a large ask for the market." While a pickup in the Strait of Hormuz traffic is promising, it will need to stabilize for a while to justify WTI prices in the mid- to low-$80/bbl area.