Oil prices tumbled on Wednesday after the US and Iran agreed to a temporary 2-week ceasefire and reopening of the Strait of Hormuz.
A last-minute agreement brokered by Pakistan averted Donald Trump’s promise to bomb civilian infrastructure while achieving the free flow of oil from the Middle East.
The US and Iran will engage in talks for a 2-week period in an effort to reach a more permanent agreement. This will be a difficult process, and talks may well fail.
But in the short term, traders were focused on the reopening of the Strait of Hormuz and the resumption of oil flowing through the 20-mile strait between Iran and Oman.
Brent Crude prices fell 14% to $93.97, while WTI sank 15% to $95.80.
The fear of a prolonged oil shock and uncertainty over how long and disruptive the war might become had weighed heavily on markets. News of a ceasefire, should it hold, marks a fundamental shift in the outlook for oil supply.
“Not only are participants pricing out the risk of near-term escalation, but they must also price in the increased likelihood that we do now see a durable, and long-lasting agreement formed to bring hostilities to an end,” said Michael Brown Senior Research Strategist at Pepperstone.
Oil prices have hit highs above $110 during the Middle East war. A holding ceasefire may mean prices continue to fall much lower than the current $94 per barrel in the coming days.