Key Takeaways:
Global oil prices recorded their steepest one-day fall since the 1991 Gulf War after the US and Iran agreed to a conditional two-week ceasefire, easing fears of a prolonged disruption to energy supplies from the Middle East.
"I agree to suspend the bombing and attack of Iran for a period of two weeks... subject to the Islamic Republic of Iran agreeing to the COMPLETE, IMMEDIATE, and SAFE OPENING of the Strait of Hormuz," former President Donald Trump said in a social media post. The potential de-escalation sent risk assets soaring, with S&P 500 futures jumping over 2.5% and Dow futures spiking 1,000 points.
The price of global benchmark Brent crude plunged approximately 16% to trade at $92.30 a barrel, while West Texas Intermediate (WTI) crude fell by a similar margin to around $93.80 a barrel. Before the announcement, WTI had traded as high as $117 during the day. The move lower was also seen in refined products, with futures for gasoline and heating oil falling sharply.
The core of the agreement hinges on the reopening of the Strait of Hormuz, a waterway that handles more than a quarter of the world's seaborne oil trade. Its effective closure since the conflict began in late February has removed millions of barrels from the market, pushing Dated Brent, a benchmark for physical barrels, to a record high of $144.42, according to S&P Global Energy Platts. The disruption led Gulf producers including Saudi Arabia, the UAE, and Kuwait to shut-in a collective 7.5 million barrels per day of production in March.
The sudden ceasefire caught many traders by surprise, prompting a rapid unwinding of geopolitical risk premiums that had been built into energy prices. "Trump was likely to be wary about letting energy prices 'skyrocket' by escalating the conflict," said Xavier Smith from market research firm AlphaSense, noting it could have led to a "self-inflicted economic wound."
However, skepticism remains about the longevity and effectiveness of the truce. In a response to the announcement, Iran's foreign minister Seyed Araghchi stated that safe passage would be possible "via coordination with Iran's Armed Forces and with due consideration of technical limitations," raising questions about whether unrestricted passage would be granted.
This uncertainty was echoed by Patrick De Haan, an analyst at GasBuddy, who wrote that a two-week ceasefire likely means "another two weeks of status quo and barely anything getting through the Strait, which is likely to continue to push oil, gasoline, diesel and jet fuel prices higher yet."
Despite the plunge, both Brent and WTI remain well above the roughly $73-a-barrel level seen before the conflict began, suggesting the market is not fully pricing in a return to normal operations. The coming days will be critical in assessing whether tanker operators have enough confidence to resume voyages through the strait, which will determine the true impact on global supply and prices.
This article is for informational purposes only and does not constitute investment advice.
