Oil prices fell below $100 a barrel on Monday as traders bet the United States and Iran were edging toward a peace deal, sending Brent crude futures down 6% to $97.43 a barrel and to their lowest level in two weeks. Stocks rose on the same hopes, even as the key shipping route at the center of the crisis remained only partly open.
Two tankers carrying liquefied natural gas were exiting the strait of Hormuz on Monday, heading to Pakistan and China, a sign that some traffic was moving again after weeks of disruption. On Saturday, a supertanker carrying Iraqi crude left the Gulf bound for China after being stranded for almost three months. For markets that had spent weeks pricing in a wider conflict, that flow mattered more than the headlines.
The move came after a framework was negotiated between Washington and Tehran, but the two sides remain at odds over Iran’s blockade of the strait of Hormuz, and an Iranian government spokesperson said an agreement was not imminent. The strait’s de facto closure sent energy prices soaring after the United States and Israel first launched missile strikes on Tehran on 28 February, and Monday’s easing in crude reflected a market trying to decide whether the worst has passed or merely paused.
Warren Patterson said traders had reason to stay cautious. “We’ve been at this stage before, only for talks to break down. Therefore, the market will likely be more cautious about overreacting,” he said. UBS analyst Giovanni Staunovo said the crucial question was not the headlines but the cargoes. “We continue to believe that the key factors for the oil market to watch should be the physical oil flows, and so far flows through the strait remain restricted,” he said.
That tension is what kept the market from treating Monday’s drop as a full reset. Flows through the strait remained restricted, and analysts have said a return to normal oil flows could take months even if the passage fully reopens. Oil prices are still far above the run-up to the Iran war, when Brent was trading at about $70 a barrel, and Barclays has kept its average Brent forecast at $100 for the year, warning prices could go higher.
Risk assets also caught a bid far beyond crude. Japan’s Nikkei rose nearly 3% on Monday, the pan-European Stoxx 600 index was up 1%, and the dollar dipped 0.3% against a basket of major currencies. The pound gained almost 0.6% to $1.3506, its highest level since mid-May, as markets continued to price in expectations that the Bank of England will raise rates twice this year.
Stephen Innes said the response made sense after weeks of energy shock. “Treasury [bond] futures rallied, gold climbed and equity futures pushed higher as investors started pricing the possibility that the world’s most dangerous energy choke point may soon reopen to something resembling normal flow,” he said. “The market response made perfect sense given how much inflation fear and hawkish rate pricing had been embedded into the curve during the recent energy shock.” The next move now depends on whether the promised diplomacy turns into open sea lanes, or whether traders are once again being asked to believe a deal that may never arrive.
