Crude Down As US-Iran Deal Might Be Close

Markets rose in thin trading on Monday after Trump announced a US-Iran deal to open the Strait of Hormuz was "largely negotiated", but uncertainty rose as Iran pushed back on the particulars.

The Key Points Moving the Market

• Crude prices fell below $100 in holiday trading after Trump suggested a deal to open the Strait of Hormuz is imminent.
• Prices are rising again as the deal has not materialised amid pushback from Iranian sources, but media reports suggest progress on key issues behind the scenes.
• Markets are in a holding pattern for news, as optimism fades and analysts warn that structural issues in oil supply could keep prices elevated even if the war ends.

Markets Fading Initial Optimism About Iran Deal

Brent started the week by dropping more than 7% after US President Donald Trump said that a preliminary deal with Iran to open the Strait of Hormuz was "largely negotiated". Asian stocks in particular were buoyant, but markets were operating with reduced liquidity, with the UK and the US, along with several other countries, away for a holiday. Through Monday, the optimism faced increasing pushback as Iranian officials went on domestic media to say no deal had been reached. US officials, meanwhile, acknowledged that they still needed to resolve issues, first saying it would take a "couple" of days. Then, early Tuesday, US Secretary of State Marco Rubio suggested it would be "a few days" before an agreement might be made after the US Navy conducted strikes on Iranian mine-laying ships and coastal launch sites. This dashed hopes of securing peace before the Islamic holiday of Eid al-Adha, which starts on Tuesday.

Brent fell as low as $96 per barrel after the news, but as doubts about the prospect of a deal increased, so did crude prices. However, the international benchmark has remained below $100, suggesting that investors haven't entirely given up hope that an agreement will be reached. Neither side has confirmed what has been agreed so far, but reports from US officials over the weekend suggested a potential "Memorandum of Understanding" that would extend the ceasefire by 60 days and reopen the Strait of Hormuz without tolls. During this period, Iran would be able to sell its oil. Sanction relief and unfreezing of Iran's assets would be conditional on Iran agreeing to suspend its nuclear programme and give up its enriched uranium. Iranian officials pushed back against most of these points, saying that tolls were a matter between Iran and Oman. The nuclear issue seemed to still be the sticking point, with multiple media outlets reporting Iran's representative had verbally agreed to hand over the fissile material during the 60-day period. Iranian officials denied the reports on domestic Farsi media outlets. However, Saudi Media reported on Tuesday that Iran is looking to have China take its highly enriched nuclear material as part of a deal.

Markets in Holding Pattern

While crude prices moved in response to the news amid thin market conditions, gold prices remained fairly stable, suggesting there hasn't been a major shift in sentiment. It's not the first time there's been hope of an imminent deal. Meanwhile, analysts warn that a prolonged closure of the Strait could keep Brent above $100 for years, even after the war is over. Weak investment in new production, damage from the war, and market concerns about renewed tensions could keep supply from matching demand. The IEA cautioned that oil markets could enter a "red zone" in July or August if the Strait isn't opened as inventories continue to fall. Crude would likely return to last week's levels unless there are clear signs of progress in reopening the Strait in the coming days.

Brent Relief Bounce of Lower Lows?

Brent has fallen below the $100 mark but remains in a consolidating formation, which could end up being a pennant or triangle. As long as the $85 low holds firm, either pattern could play out. If today’s bounce continues, the next resistance lies at the middle VWAP near $103/bbl. On the other hand, a break of the lower VWAP could initially open the door to $90.

Source: SpreadEx | Brent Crude, Daily Chart