BY COMFORT OGBONNA
Oil prices extended their decline on Thursday, dropping more than 2% to their lowest levels since the early days of the Iran conflict, as investors welcomed a breakthrough agreement between the United States and Iran that could restore a significant portion of disrupted global energy supplies.
The sharp sell-off reflected growing confidence that the interim agreement will ease tensions in the Middle East, reopen critical shipping routes, and pave the way for increased Iranian oil exports. Traders responded by reducing the geopolitical risk premium that had driven crude prices sharply higher during the conflict.
Brent crude futures fell $1.59, or 2%, to $77.96 a barrel, while U.S. West Texas Intermediate crude declined $1.83, or 2.38%, to $74.96 a barrel. The declines pushed both benchmarks to their lowest levels in more than three months, marking a dramatic reversal from the price spikes seen during the height of the conflict.
The latest weakness in oil markets follows the signing of a 14-point memorandum of understanding between Washington and Tehran. The agreement initiates a 60-day negotiation period aimed at securing a comprehensive peace settlement and restoring stability to one of the world’s most strategically important energy-producing regions.
A key provision of the deal calls for Iran to permit toll-free passage through the Strait of Hormuz, a critical maritime corridor that handles a substantial share of the world’s oil and liquefied natural gas shipments. The agreement envisions restoring traffic through the strait to full operational capacity within 30 days, a move that could significantly improve global energy flows and ease supply concerns.
The Strait of Hormuz has long been viewed as one of the most important chokepoints in global trade. Any disruption to shipping in the narrow waterway can have immediate effects on oil prices, inflation expectations, and economic growth worldwide. During the conflict, fears of prolonged disruptions contributed to a sharp rise in crude prices as traders worried about potential shortages.
With those concerns now beginning to fade, investors are increasingly focusing on the possibility of additional oil entering global markets. Analysts believe the return of Iranian crude exports, combined with improved shipping conditions, could help rebalance supply and demand in the coming months.
Market observers noted that traders are aggressively pricing in a faster-than-expected recovery in Iranian oil production and exports. The prospect of additional barrels reaching international markets has become one of the primary drivers behind the recent decline in crude prices.
Despite the optimism, experts caution that a full normalization of energy markets will take time. The interim agreement leaves several major issues unresolved, including the future of Iran’s nuclear program, which remains a central topic in ongoing negotiations. The deal also requires the United States and its international partners to develop a substantial economic recovery plan for Iran, adding another layer of complexity to the discussions.
Energy analysts expect shipping volumes through the Strait of Hormuz to recover gradually rather than immediately. Infrastructure, security arrangements, and commercial logistics will all need to be restored before trade returns to pre-conflict levels.
Goldman Sachs forecasts that oil exports from the Gulf region could return to normal levels by the end of July, while crude production may recover fully by October. The investment bank estimates that flows through the Strait of Hormuz could increase by approximately 13 million barrels per day from current levels as operations normalize.
Industry experts emphasize that although the worst disruptions may be over, conditions remain far from normal. Many market participants believe the geopolitical risk premium that was built into oil prices during the conflict has largely disappeared, contributing to the recent sell-off.
However, analysts do not expect prices to collapse. As countries rebuild strategic petroleum reserves and energy companies work to replenish inventories, demand for crude is expected to remain relatively strong. This process could help prevent a steeper decline in prices even as supply conditions improve.
International Monetary Fund Managing Director Kristalina Georgieva echoed that view, stating that oil prices are likely to continue easing but are unlikely to experience a dramatic collapse. She noted that recovering demand, inventory rebuilding, and the gradual restoration of maritime trade should provide support for the market.
The International Energy Agency also stressed the importance of successfully completing negotiations within the 60-day timeframe. Agency officials have repeatedly warned that prolonged uncertainty surrounding the Strait of Hormuz could pose serious risks to the global economy, given the region’s central role in energy supply chains.
In addition to geopolitical developments, investors are also weighing the impact of monetary policy on energy demand. Growing expectations that the U.S. Federal Reserve could raise interest rates later this year have added another bearish factor for oil markets.
Higher interest rates tend to slow economic activity by increasing borrowing costs for consumers and businesses. Slower growth can reduce demand for fuel, transportation, manufacturing, and industrial production, all of which influence global oil consumption.
Recent comments from Federal Reserve officials and stronger-than-expected U.S. economic data have prompted traders to increase their expectations for additional monetary tightening. As a result, concerns about future oil demand are adding to the downward pressure already created by improving supply prospects.
For now, the market remains focused on the progress of U.S.-Iran negotiations and the pace at which oil shipments can return to normal levels. While the peace agreement has significantly improved sentiment, traders recognize that considerable work remains before global energy markets can fully recover from the disruptions caused by the conflict.
The coming weeks are expected to be crucial for both oil markets and the broader global economy, as investors monitor diplomatic developments, shipping activity through the Strait of Hormuz, and the evolving outlook for interest rates and economic growth.
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