- Oil extends its decline amid anticipation of a US-Iran peace deal.
- Iran has committed to reopening the Strait of Hormuz.
- The Fed kept interest rates on hold in the previous session.
Oil extended declines on Thursday as traders anticipated a surge in supply after the US and Iran announced a peace deal. The deal, when signed, will reopen the Strait of Hormuz, easing supply disruptions. Meanwhile, market participants assessed the FOMC policy meeting, during which officials voted to keep interest rates unchanged.
The news of a deal to end the Iran war first came from Trump on Saturday, sending oil prices lower. For months, oil traders have had to deal with uncertainty about the future and a tight market. The conflict that began in late February led to the closure of the Strait of Hormuz, choking off a significant portion of global oil supply.
Consequently, oil prices have risen by more than 30% since the war began. The rise in prices has hurt consumers and producers alike in many countries. At the same time, it has put central banks under intense pressure to balance growth and inflation.
For a long time, the US and Iran have held talks in a bid to find a common ground and end the war. However, the process has taken far too long and has at times led to an escalation of the war. As a result, traders have become weary of any news of progress towards a peace deal. Most times, it has led to strikes and increased hostilities.
However, last week, Trump sounded more optimistic about recent talks. The US president even called off planned strikes on Iran on Thursday, opening the door to negotiations. On Saturday, he announced that the two nations had finally reached an agreement that would end the war.
Strait of Hormuz traffic (Source: Bloomberg, Polymarket)
With this deal, Iran has committed to reopening the Strait of Hormuz. Markets are more confident that traffic will return to normal. Meanwhile, the US will end its blockade of Iranian ports. Traders are eagerly awaiting the signing of this deal, scheduled for Friday.
However, some experts remain cautious because history could repeat itself. Trump has said that he will resume attacks on Iran if they fail to keep their commitments. Still, others are already forecasting a surge in supply. The International Energy Agency expects supply to increase significantly next year.
Elsewhere, the Fed kept interest rates on hold in the previous session. Some policymakers are still okay with a rate hike later this year to tame inflation.
