Oil prices drop to three-month low after US-Iran deal struck

Prices fall to lowest levels since March 10

A small motorboat passes anchored vessels in the Strait of Hormuz. Oil prices slipped to a three-month low on Monday after US president Donald Trump and Iran's deputy foreign minister said they had reached an initial deal to end the war and to resume traffic through the Strait of Hormuz. Picture: Amirhosein Khorgooi/ISNA via AP 

Oil prices slipped to a three-month low on Monday after US president Donald Trump and Iran's deputy foreign minister said they had reached an initial deal to end the war and to resume traffic through the Strait of Hormuz.

Brent crude futures fell $4.33, or nearly 5%, to $83.00 a barrel by 8.40am on Monday and US West Texas Intermediate was at $80.34, down $4.54, or 5.35%. Both contracts fell to their lowest levels since March 10 on Monday after tumbling more than 3% on Friday.

The US and Iran will sign a memorandum of understanding in Switzerland on Friday, said the prime minister of Pakistan, whose country has served as a mediator. Mr Trump said on Sunday that the Strait of Hormuz would be open "toll free" and that a US naval blockade of Iranian ports would also end.

Iran's semi-official Mehr news agency said the draft deal called for reopening the Strait of Hormuz within 30 days under Iranian arrangements.

"It will take time for oil to approach the pre-crisis level of 20 million barrels per day sailing through this chokepoint. Estimates of the full resumption of traffic vary from weeks to months," said Tamas Varga, analyst at PVM Oil Associates.

"Financial investors are, therefore, merely borrowing future physical supply, hence the current cheapening of oil prices. The slow resumption will possibly result in a supply deficit throughout 2026."

The world has lost millions of barrels of oil and gas supply since the war closed the Strait of Hormuz, a chokepoint for a fifth of the world's oil and liquefied natural gas supplies, for more than three months.

Investors are also watching cautiously how quickly Middle Eastern producers can resume oil production and exports following damage from the war and whether more ships will enter the region.

"The damage already done cannot be reversed overnight. This includes not only any physical damage to oil infrastructure but also the economic strain endured by oil importing economies that have faced elevated energy costs for months," said Priyanka Sachdeva, senior market analyst at Phillip Nova.

Iran's deputy foreign minister, Kazem Gharibabadi, said a more expansive agreement would be negotiated during a 60-day ceasefire period.

However, Israeli defence minister Israel Katz said the military would remain in security zones in Lebanon, Syria and Gaza indefinitely. The fate of Iran's nuclear program, another thorny issue, will also be addressed in those later talks, sources previously told Reuters.

The UK, France, Germany, and Italy said on Sunday they were prepared to lift sanctions on Iran in response to steps on its nuclear programme.