Oil Prices Sink as Deal Hopes Grow

Oil prices plummeted yesterday and continued to decline today as optimism about a deal between the US and Iran grows. Despite hopes of a potential agreement, markets may be getting ahead of themselves.

The Brent crude price settled more than 5% lower, dropping below $80 per barrel. The downward pressure has persisted in early morning trading today. A possible short-term deal could see the Strait of Hormuz reopen, but any agreement would likely be temporary, and the market should not get too carried away.

There is still a significant gap between the US and Iran on managing the Strait of Hormuz and the nuclear issue. As a result, there's a real risk that any deal could unravel quickly, much like the Memorandum of Understanding. Tanker movements through the Strait remain severely constrained, keeping global oil markets tight.

If a deal holds, oil flows from the Persian Gulf would likely normalize, shifting attention to the supply and demand balance in the fourth quarter and 2027. OPEC+ output is expected to increase following on-paper supply increases during the war. This could lead to a comfortable balance sheet in 2027.

However, a large portion of the expected surplus next year would be absorbed by restocking demand. The longer it takes for Middle East flows to normalize, the larger and longer this restocking process will last.