Oil markets fell sharply on Thursday after a U.S.-Iran diplomatic breakthrough raised expectations that Iranian crude supply could soon return to global markets, sending benchmarks down more than $2 a barrel.
Brent crude futures fell $2.14, or 2.69%, to $77.41 a barrel by mid-morning in London, while U.S. West Texas Intermediate dropped $2.36, or 3.07%, to settle at $74.43.
Brent touched its lowest level since March 2, the first day of trading after the United States and Israel launched their initial strikes against Iran, while WTI sank to levels not seen since March 4, markers that underline just how dramatically Thursday’s moves rewound the war premium that had been baked into crude prices for months.
The memorandum of understanding between the U.S. and Iran, announced earlier this week, set out a framework to end more than three months of war that had set the Middle East aflame and shaken the global economy.
Early in the war, Iranian attacks on shipping brought traffic through the Strait of Hormuz, through which a fifth of the world’s oil and natural gas had passed before the conflict to a near standstill, while Trump imposed a blockade in response. The closure of the strait, alongside Iranian attacks on Gulf energy infrastructure, sent fuel prices skyrocketing and rippled through the world economy.
The agreement, described as a memorandum of understanding, is an initial framework and not a final peace agreement. It sets out a 60-day ceasefire period during which further talks are expected to address unresolved issues, including Iran’s nuclear program and the status of its highly enriched uranium stockpiles.
According to leaked copies of the interim agreement that officials say broadly match the final document, Iran will immediately take steps to reopen the Strait of Hormuz once the deal is signed, and will be allowed to sell its oil without restrictions. That provision alone proved enough to send traders scrambling to cover long positions built on months of supply anxiety.
Thursday’s sell-off extended a rout that had already begun to gather pace since the weekend’s announcement. “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,” said IG market analyst Tony Sycamore.
Yet a brief spike on Wednesday served as a reminder of how fragile the rally remains. Trump, in response to a reporter’s question at the G7 summit in France, said that the text of the agreement is not final and that if Iran doesn’t “behave,” the U.S. will “go right back to dropping bombs right smack in the middle of their head.”
He also opened the door to abandoning it entirely, noting: “It’s a memorandum of understanding, and if I don’t like it, we’ll go back to shooting at them.” That hawkish posturing briefly jolted prices higher before Thursday’s renewed selling reasserted itself.
The deal carries a heavy price tag for Washington and its partners. The accord lays out that the U.S. would secure at least $300 billion to rebuild Iran after the war and work to end all American and United Nations sanctions imposed on Tehran if a final agreement addressing Iran’s nuclear program is reached.
Critically, the hardest questions have been set aside for later. The interim deal sets a 60-day window, which can be extended, to negotiate over limiting Iran’s nuclear program, which has been discussed at multiple rounds of talks during Trump’s second administration without success.
Iran maintains its nuclear program is peaceful, though it has enough highly enriched uranium to build multiple atomic bombs should it choose to do so, according to the IAEA.
The deal calls for the U.S. to lift its blockade on Iranian ports and for the strait to return to its prewar traffic levels within 30 days, while acknowledging that Iranian mines may still be present in its waters and need to be destroyed.
Mukesh Sahdev, CEO of energy consultancy X Analysts, warned that “the volume of crude returning to the market after Hormuz reopens could be limited, as some cargoes already exited through workaround arrangements, while shipowners may remain reluctant to send tankers back into the region amid concerns the agreement could collapse. ” He added that overall crude demand may recover faster than supply, “checking price falls to pre-war levels.”
Even if the strait fully opens, it will likely take months for the global energy crisis sparked by its closure to ease.
Looking further ahead, the International Energy Agency struck a more dramatic note. If the agreement is successfully implemented and the Strait fully reopened, the IEA warned Wednesday that this year’s supply crisis could flip into a significant supply glut by 2027, forecasting that supply will outstrip demand by 5.05 million barrels per day next year as Middle Eastern oil floods back into the market.
Oil’s slide is not entirely a Middle East story. Weighing additionally on the market are rising expectations that the U.S. Federal Reserve may raise interest rates later this year to combat stubbornly elevated inflation, a move that could slow economic growth and suppress energy demand.
Wednesday’s projections showed nine of 19 Fed policymakers now believe a rate hike will be necessary, a striking departure from three months ago, when not one of them held that view.
World leaders from Europe to the Middle East welcomed the deal. French President Emmanuel Macron said France and its Western partners are ready to act quickly to help restore normal shipping through the strait, noting that France already has naval forces in the area, including its nuclear-powered aircraft carrier, the Charles de Gaulle.
Israel’s defense minister, however, said the country would not withdraw from land seized in Lebanon, where Israel is fighting Iranian-backed Hezbollah, a complication that clouds the broader regional settlement the deal aspires to deliver.
For oil traders, the question is no longer if the Strait of Hormuz will reopen, but how quickly, how durably, and whether the diplomatic architecture holding this fragile agreement together will survive the 60-day negotiating gauntlet that lies ahead.
WHAT YOU SHOULD KNOW
A U.S.-Iran interim deal has cracked open the door to the Strait of Hormuz, sending oil prices tumbling, but don’t expect lasting relief at the pump just yet.
The agreement is a ceasefire framework, not a final peace, with Iran’s nuclear program, a $300 billion reconstruction bill, and regional instability all left unresolved.
Markets are pricing in optimism, but analysts warn that the physical return of Iranian oil will be slow, shipowners remain wary, and a single Trump tweet or a collapsed negotiation could send prices surging again.
