Strait of Hormuz deal sends oil below $80 as supply fears ease

Oil prices tumbled below $80 a barrel for the first time since March after President Donald Trump announced a deal with Iran to reopen the Strait of Hormuz, ending a conflict that removed a fifth of global crude supply from the market.

"Markets are pricing in a swift return of supply, but the operational reality is more complex," said Clay Seigle, non-resident scholar at the Center for Strategic and International Studies. "The litmus test is whether ship operators are sufficiently reassured to resume normal operations."

Brent crude settled at $78.96 a barrel Monday, down $4.21, or 5.1%, while West Texas Intermediate closed at $76.05, down $4.70, or 5.8%. Both benchmarks briefly added less than 1% in early Asian trading Tuesday. The retreat marks a more than 30% decline from the highs above $120 reached during the conflict that began Feb. 28, when the US and Israel launched airstrikes on Iran. US equities rallied on the news, with the Dow Jones Industrial Average climbing 517 points, or 1%, while the S&P 500 and Nasdaq gained 1.5% and 2.4%, respectively.

The agreement, to be formally signed Friday in Switzerland, establishes a 60-day framework for negotiations on Iran's nuclear program and calls for the strait to remain permanently free for navigation. But analysts cautioned that restoring shipping activity and oil production to pre-conflict levels could take months. About 100 million barrels of crude remain stranded on vessels near the waterway, and mine-clearing operations, vessel security concerns, and the gradual restart of shut-in oil fields all pose logistical hurdles.

The deal caps a period of extreme volatility in energy markets. Before the conflict, Brent crude was trading at about $70 a barrel. Prices surged to around $120 during the war, with the strait effectively closed after Tehran threatened to attack vessels using the waterway. The reopening removes the single largest geopolitical risk premium embedded in crude prices.

Trump announced the agreement on his social media platform Truth Social, writing: "The Deal with the Islamic Republic of Iran is now complete. Ships of the World, start your engines. Let the oil flow!" He said the strait would reopen without a toll collection mechanism and that the US would end its naval blockade of Iran. Iran's semi-official Fars News Agency reported that vessel transits would be toll-free for 60 days.

Pakistan, which mediated the talks, confirmed the deal. Prime Minister Shehbaz Sharif said the signing ceremony would take place Friday in Switzerland. Neither Washington nor Tehran has yet released the full text of the agreement.

The 60-day negotiating window will focus on unresolved issues including Iran's nuclear program. Trump said he did not rule out submitting the final agreement to Congress for approval and pledged to release the peace deal files in the coming days.

For energy markets, the immediate question is how quickly supply can return. John Goh, senior oil market analyst at Sparta in Singapore, said the market expects about 100 million barrels of stranded crude to be released once the agreement is implemented. But he cautioned that as long as the strait remains effectively closed, there has been no substantive change in the broader supply picture.

Oxford Economics analysts said the agreement is an important step toward a broader resolution but warned that shipping activity is unlikely to immediately return to normal levels. Industry officials have noted that bringing some Persian Gulf production facilities back to full capacity could take months due to operational and infrastructure challenges.

The decline in oil prices carries broader economic implications. US gasoline prices, which had risen above $4 a gallon during the conflict, are expected to fall, potentially easing inflationary pressures and altering expectations for the Federal Reserve's interest rate path. Lower energy costs also benefit sectors such as airlines and shipping, which had been squeezed by elevated fuel expenses.

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