Oil Extends Drop as Trump Forges Middle East Ceasefire Agreement
(Bloomberg) -- Oil extended a slump as US President Donald Trump announced a ceasefire between Iran and Israel.
Brent futures tumbled more than 5%, dropping below $68 a barrel, as Israel said it had agreed to the move. The plunge — which followed a roller-coaster session on Monday that ended in steep losses — took prices below the level on June 12, the day before Israel attacked Iran. Gold fell as haven demand ebbed.
In a move that stands to lower crude’s risk premium, Trump first said that Israel and Iran had agreed to a “total ceasefire,”according to a Truth Social post, then he followed up to say the agreement was “now in effect”. Israel agreed to the truce, according to Prime Minister Benjamin Netanyahu. Iranian Foreign Minister Abbas Araghchi said that his country would hold fire if Israeli strikes stopped.
The oil market has been rocked by the crisis in the Middle East on concerns the conflict could disrupt supplies from the region that pumps about a third of the world’s crude. Prices spiked, then retraced gains as the standoff unfolded, with Israel, Iran and the US all avoiding hits on oil-related infrastructure and vessels continuing through the Strait of Hormuz with only minor disturbances.
“Traders are now firmly of the belief that the risk of a supply shock is now firmly in the rear-view mirror.” said Chris Weston, head of research at Pepperstone Group Ltd. “The prospect of a prolonged conflict with US involvement has been repriced, giving the green light to add risk.”
In a sign of reduced tensions, Brent’s prompt spread — the difference between its two nearest contracts — narrowed to 82 cents a barrel in backwardation. While that’s still a bullish pattern, with nearer-term prices above those further out, it’s down from last week’s closing peak of $1.77 a barrel. The key December-December spread fell back into contango, the opposite, bearish pricing structure.
In wider energy markets, European natural gas prices fell by as much as 13% at the open, as fears of disruptions at Hormuz — a conduit for 20% of seaborne gas shipments — may fade. Meanwhile, US LNG exports are ramping up after maintenance, which will add supply to the market.
The Mideast crisis erupted about two weeks ago, as Israel attacked Iran in a bid to eradicate its nuclear program, decimate its leadership, and degrade its military, with Tehran firing missiles in reply. In a major escalation, Trump ordered a strike against the Islamic Republic’s nuclear sites. Iran’s retaliation to that was a limited missile salvo against a US air base in Qatar.
The tentative ceasefire in the Middle East — if it takes effect and lasts — may pull traders’ main focus back to the crude market’s underlying fundamentals. There are widespread expectations that oil supplies will run ahead of demand in the second half of this year, spurring a build-up in global stockpiles.
The OPEC+ alliance — which includes Iran as member — has been reactivating idled capacity at a rapid pace in a bid to recapture market share. Further increases in collective supplies are expected in the months to come.
Trump has made plain he favors cheaper energy to buttress his economic agenda, including his aggressive trade policy. On Monday, he demanded producers push down crude prices after the US military strikes on Iran, while urging the Energy Department to boost drilling.
Speaking to Fox News after Trump announced the ceasefire, Vice President JD Vance said that the US bombing over the weekend had met its objectives. “We know that they cannot build a nuclear weapon,” Vance said.
Lower oil prices may quell inflationary pressures, easing the challenge facing central bankers and potentially aiding the case for interest-rate reductions. In recent days, Federal Reserve Governor Christopher Waller and Vice Chair for Supervision Michelle Bowman have said they could support a cut in July if inflation remained contained.
The OPEC+ alliance is due to hold a video-conference on July 6 to consider a further supply increase in August. Before that, Rosneft PJSC Chief Executive Officer Igor Sechin said that steps taken by the group to boost supplies had proved astute, citing factors including the Middle East.
“In a week and a half, OPEC+ will agree to increase production by another 400,000 barrels a day,” said Robert Rennie, head of commodity and carbon research at Westpac Banking Corp. “As we move into the third quarter — and global production rises and demand wanes, driving inventory sharply higher — we will see prices probing the lower end of the previous $60-to-$65 range.”
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