Oil Drops to 3-Month Low as US-Iran Deal Signals Supply Return

Oil prices fell by more than $2 per barrel on Thursday after the U.S. and Iran signed an interim agreement that would end the Iran war, reopen the Strait of Hormuz and waive U.S. sanctions on Tehran's oil, boosting the oil supply outlook.

Brent crude futures LCOc1 were down $2.14, or 2.69%, at $77.41 a barrel as of 0616 GMT, and U.S. West Texas Intermediate CLc1 fell $2.36, or 3.07%, to $74.43 a barrel.

Brent sank to its lowest since March 2, which was the first day of trading after the U.S. and Israel began attacking Iran, while WTI was at its lowest since March 4.

The benchmarks resumed their decline, reversing a jolt higher on Wednesday that followed comments from U.S. President Donald Trump saying he could resume his bombing campaign if Iran's leaders "don't behave".

"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," IG market analyst Tony Sycamore said in a note.

The 14-point memorandum begins a 60-day negotiation period during which Iran will allow toll-free passage through the Strait of Hormuz, a key oil and gas shipping lane. The deal calls for traffic through the strait to be restored to its full capacity within 30 days.

The preliminary accord defers many of the more difficult issues such as Iran's nuclear program, and also requires the U.S. and its partners to come up with a $300 billion plan to finance Iran's recovery.

Analysts are cautious on how much further oil prices might decline in the near term, as supply could remain tight even after the Strait of Hormuz reopens.

"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," said Mukesh Sahdev, CEO of energy consultancy XAnalysts.

"Overall crude demand may come faster than supply, checking price falls to pre-war levels," he said.

If the U.S.-Iran agreement is successfully implemented and the strait reopened, this year's supply crisis could turn into a significant supply glut in 2027, the IEA cautioned on Wednesday, forecasting in its monthly market report that supply will outstrip demand by 5.05 million barrels per day next year as Middle East oil returns to the market.

Also weighing on the oil market are ramped-up bets the U.S. Federal Reserve may raise interest rates later this year to rein in inflation, which could slow economic growth and suppress oil demand.

Nine of 19 Fed policymakers now think a rate hike will be needed, Wednesday projections showed, a departure from three months ago when none of them held that view.

(Reuters - Reporting by Colleen Howe in Beijing and Siyi Liu in Singapore; Editing by Sonali Paul)

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