Oil plunges 5% as US-Iran peace deal reopens Strait of Hormuz

The US-Iran peace deal deflates the geopolitical risk premium in oil, sending Brent below $84 for the first time since March.

The US and Iran reached a peace agreement Sunday, reopening the Strait of Hormuz and sending Brent crude below $84 a barrel, the lowest since the war began in late February.

"The lack of details especially on freedom of shipping is a concern, but not one that should constrain markets today as the surge in risk appetite plays out," said Sean Callow, senior FX analyst at ITC Markets.

Brent crude futures fell 4.7% to $83.82 a barrel by 2203 GMT Sunday, while West Texas Intermediate dropped 5.7% to $80.95. The moves extended Friday's declines after Pakistan Prime Minister Shehbaz Sharif said a final deal text had been agreed. The agreement includes oil sanctions waivers and the release of about $25 billion in frozen Iranian assets, according to a draft reported by Iran's Mehr News Agency.

The deal removes the single biggest geopolitical risk in energy markets, but analysts caution it could take until the end of July for Strait of Hormuz traffic to fully normalize. The waterway handles about 20% of global oil and LNG flows, and mines must be cleared before commercial shipping can resume at pre-war levels.

The cross-asset reaction was immediate. S&P 500 futures climbed 0.8% and Nasdaq futures jumped 1.4% as lower energy costs eased inflation concerns. Gold rose 1.4% to $4,280 an ounce, while the US dollar slipped, with the euro gaining 0.4% to $1.1608. In Asia, Hong Kong-listed airline stocks surged — Air China jumped 10.6%, China Southern rose 8.9% and China Eastern added 8.5% — on expectations of lower jet fuel costs. Oil producers sank, with PetroChina and CNOOC each falling more than 3%.

The last time oil prices fell this sharply on a geopolitical development was in April 2020, when the OPEC+ alliance agreed to record production cuts after the Saudi-Russia price war. That episode saw Brent drop about 20% in a single week before stabilizing. The current move, while significant, leaves crude still above the $67 level it traded at before the war began in late February.

Central banks meeting this week — including the Federal Reserve, Bank of England and Bank of Japan — will be watching closely. Lower oil prices ease one of the key upside risks to inflation forecasts, potentially reducing pressure for rate hikes. Markets trimmed the probability of a Fed hike this year, with December futures edging up four ticks and an October move now priced at about 40%.

Goldman Sachs cut its average Brent forecast for 2027 to $80 a barrel from $85, citing rising supply from the US, Brazil and Guyana alongside weaker Chinese demand. The bank continues to see Brent averaging $90 in the fourth quarter of 2026, balancing the prolonged Hormuz disruption against a milder-than-expected supply shortfall.

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