Market Reaction

On Monday oil prices slumped more than 4% after the United States and Iran announced an interim peace agreement that could reopen the Strait of Hormuz. At 16:42 ET (20:42 GMT) Brent crude futures for August delivery fell 4.3% to $83.55 a barrel, while U.S. West Texas Intermediate (WTI) for July delivery dropped 4.3% to $81.22 a barrel.

Interim Peace Deal Details

President Donald Trump said on Sunday the deal was "complete" and that he had fully authorized a "toll‑free opening of the Strait of Hormuz" together with the immediate removal of the U.S. naval blockade of Iranian ports and coastline. A memorandum of understanding (MoU) is scheduled to be signed in Switzerland on Friday, with Pakistan acting as chief mediator. Pakistani Prime Minister Shehbaz Sharif stated that the two nations had "declared the immediate and permanent termination of military operations on all fronts," including Lebanon. Iran’s foreign ministry spokesperson Esmaeil Baqaei indicated that the signing meeting would likely take place on Friday and that the MoU would obligate Washington to lift all sanctions on Iran. Both sides said further negotiations on Iran’s nuclear programme and sanctions would continue for 60 days after signing. Trump later told reporters in France that Iran had "fully agreed" never to possess a nuclear weapon and would refrain from further uranium enrichment or expanding its nuclear facilities.

Analyst Commentary

JPMorgan analysts led by Nora Szentivanyi noted that the agreement pushed Brent to a three‑month low near $83 per barrel and that, while key terms still need signing, the deal provides a positive signal that diminishes downside growth risks. They added that resumption of oil flows could reduce the tail‑risk of another energy‑price shock and materially lower headline CPI inflation momentum in the coming months.

Trump on Strait Reopening

Trump announced that the Strait of Hormuz would be fully reopened on Friday, adding that ships were already beginning to transit the waterway and that the partial opening was already in effect.

Implications for Inflation and Monetary Policy

The conflict‑driven oil supply disruption had previously fed an inflationary shock and heightened expectations of central‑bank rate hikes. The Federal Reserve’s policy committee is set to deliver its first rate decision under new chair Kevin Warsh on Wednesday, with markets expecting the key policy rate to remain steady despite recent strong labour‑market and inflation data. The prospect of normalized oil flows gives the Fed some breathing room, as the odds of further rate hikes had risen after the oil shock. The European Central Bank became the first major reserve bank to raise rates last week, citing the Iran‑linked energy shock.

U.S. Strategic Petroleum Reserve (SPR) Update

U.S. emergency oil stockpiles fell to 340.3 million barrels, the lowest level since 1983, according to the Department of Energy. The drawdown reflects heavy use of the SPR to offset soaring gasoline prices caused by the Iran war. Overall U.S. crude inventories excluding the SPR are also declining, driven by record‑high exports as the United States seeks to fill the supply gap left by the Hormuz closure. The Energy Information Administration’s weekly petroleum status report is due in two days.

Walt Chancellor, energy strategist at Macquarie, forecast U.S. crude inventories to be down 6.1 million barrels for the week ending 12 June, following a 7.2 million‑barrel draw in the prior week. He noted persistently high crude exports and continued SPR draws could inject volatility into weekly statistics.

Contributors

The article was contributed by Ayushman Ojha and Scott Kanowsky.