Brent crude plunges 15% to $79 as US-Iran deal reshapes rate outlook

Brent crude crashed below $79 a barrel Tuesday, capping a 15% decline in four sessions, as the expected reopening of the Strait of Hormuz unleashed a supply wave that is already redrawing central bank rate paths from Washington to Tokyo.

"The environment has tilted dovish — the oil drop provides a real disinflationary push, but markets won't front-run until they hear directly from Wash," said Billy Leung, investment strategist at Global X Management.

Brent settled at $78.96, down 5.1%, while WTI crude fell 5.8% to $76.05 — both at their lowest since early March. The selloff cascaded through markets: the Dow Jones Industrial Average hit a record close of 51,999.67 as investors rotated into cyclicals, while the S&P 500 fell 0.6% and the Nasdaq Composite dropped 1.2%. The US 10-year Treasury yield held at 4.43%, and Australian and Japanese benchmark 10-year yields each fell at least five basis points. Gold extended its rally to 6% over four sessions.

The 15% collapse in crude — the fastest four-day drop since the 2020 pandemic crash — removes a major source of inflationary pressure just as Fed Chair Kevin Warsh convenes his first policy meeting. Bloomberg Economics reported Warsh may break with precedent by not submitting personal rate dot-plot forecasts, injecting unprecedented uncertainty into the rate path. Options markets now span bets from rate cuts to multiple hikes, reflecting the deepest divergence in Fed pricing in years.

The catalyst for the rout is a diplomatic breakthrough. The US and Iran are preparing to sign a memorandum of understanding in Switzerland on June 19 that would reopen the Strait of Hormuz, the chokepoint that carried about a fifth of global oil supply before the conflict. President Donald Trump said the strait would remain toll-free beyond an initial 60-day period, sending Brent down nearly 5% Monday and accelerating the selloff Tuesday.

Yet the speed and scale of normalization remain uncertain. RBC Capital Markets analysts led by Helima Croft said it would take "months to reach anything close to Feb. 27 levels" — the date before the war began. About 2,000 ships remain stranded in the Gulf, and US officials have said mine-clearing operations alone will take six months. Secretary of State Marco Rubio described the reopening as merely "a prerequisite that opens the door" to Phase 2 nuclear talks.

Supply Wave Meets Demand Destruction

The supply-side story is colliding with mounting evidence of demand compression. China's May crude imports fell to 33.08 million tonnes, or 7.79 million barrels a day — the weakest monthly print since October 2017 and less than half the 11.6 mb/d average through 2025. India's imports have declined 13% to 15% from pre-war levels, with Middle Eastern supply plunging 61% in March before partial replacement by Russian crude under a temporary US waiver.

The demand picture is further clouded by structural shifts. China's new-energy vehicle penetration hit a record 62.9% in May, meaning nearly two of every three new passenger cars sold were electric or plug-in hybrid. For the first time, all 10 of China's best-selling passenger cars were new-energy vehicles.

Banks Slash Forecasts, Inventories Drain

Wall Street is recalibrating fast. Goldman Sachs now expects Persian Gulf exports to reach pre-war levels by the end of July, a month earlier than previously forecast, and cut its fourth-quarter Brent estimate by $10 to $80. Morgan Stanley sees 50% of production back by September and 80% by December. The Dubai and Murban benchmarks have both flipped into contango, the bearish structure that signals oversupply.

The inventory backdrop remains precarious. The Energy Information Administration's June Short-Term Energy Outlook projects OECD stocks will fall to 50 days of future demand cover by year-end — the lowest since January 2003. US commercial crude stocks fell by 8 million barrels to 433.7 million barrels in the week ending May 29, now 3% below the five-year average. Combined with Strategic Petroleum Reserve drawdowns, total US crude stocks have fallen roughly 90 million barrels from their recent peak. Distillate inventories at 102.3 million barrels are approaching the psychologically critical 100-million-barrel threshold last breached in 2003.

The Fed Wildcard

The oil collapse arrives as the Federal Reserve opens its two-day meeting with maximum uncertainty about the path ahead. PGIM forecasts three rate hikes this year; Citigroup's Andrew Hollenhorst predicts cuts; BNP Paribas expects three hikes starting in December. The divergence reflects not just disagreement about the economy but about how Warsh will communicate. If he abandons the dot-plot, as Bloomberg Economics suggests, markets will lose their primary forward-guidance tool at a moment when the disinflationary tailwind from lower oil prices is most potent.

"If the war truly ends and oil flows freely, yields will fall in the short term," said Byron Anderson, head of fixed income at Laffer Tengler Investments, which manages more than $1.7 billion. "Once energy inflation evaporates, rate hike expectations will also collapse."

This article is for informational purposes only and does not constitute investment advice.