Oil prices fell sharply on Thursday, extending losses to their lowest levels since the early days of the Iran conflict, after details of a U.S.-Iran memorandum of understanding signaled a potential end to hostilities, the reopening of the Strait of Hormuz, and the prospect of increased Iranian oil exports.
Brent crude futures dropped $1.59, or 2%, to $77.96 a barrel, while U.S. West Texas Intermediate crude fell $1.83, or 2.38%, to $74.96 a barrel. The decline pushed Brent to its weakest level since March 2, the first trading session after the initial U.S.-Israeli strikes on Iran, while WTI touched its lowest level since March 4.
The selloff accelerated after Iran’s official IRNA news agency published details of a proposed agreement that is expected to be signed on Friday. The release came shortly after a U.S. official circulated a copy of the draft text, which Washington later said had been digitally signed.
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According to the memorandum, Washington and Tehran would halt military actions across all fronts, while both sides commit to ending naval blockades in the region. The agreement also outlines measures aimed at restoring maritime traffic through the Persian Gulf and Gulf of Oman and reducing tensions that have disrupted global energy markets for months.
Under the terms published by IRNA, the United States would grant Iran access to frozen financial assets and lift restrictions affecting Iranian ships and ports. In return, Iran would facilitate the restoration of maritime traffic to pre-war levels through the Gulf and Gulf of Oman and commit not to produce or acquire nuclear weapons.
A central element of the agreement is the reopening of the Strait of Hormuz, one of the world’s most critical energy chokepoints through which roughly a fifth of global oil and gas supplies normally pass. Since the outbreak of hostilities, the waterway has faced severe disruptions, creating fears of prolonged supply shortages and driving oil prices sharply higher.
The 14-point memorandum establishes a 60-day negotiation framework during which Iran will allow toll-free passage through the Strait of Hormuz. The accord targets restoring shipping traffic to full operating capacity within 30 days.
Market participants interpreted the development as significantly improving the global supply outlook.
“The sell-off extended as energy markets continued to aggressively price in a faster-than-expected return of Iranian barrels following the recent U.S.-Iran memorandum of understanding,” said IG market analyst Tony Sycamore.
The agreement postpones some of the most contentious issues, including the future of Iran’s nuclear program, while requiring the United States and its partners to formulate a $300 billion plan to support Iran’s post-war recovery.
Even with the breakthrough, analysts caution that a full normalization of energy flows will take time.
Goldman Sachs expects Gulf oil exports to return to pre-war levels by the end of July, with crude production recovering more gradually through October. The bank estimates that restoring exports will require a roughly 13 million barrel-per-day increase in Hormuz traffic from current levels, lifting flows back to about 70% of pre-war volumes.
Industry observers also warn that the removal of the war-related risk premium does not necessarily mean oil prices will collapse.
“Whilst it does seem the worst is behind us, things are quite a long way off from being normal,” said Matt Stanley, an analyst at Kpler, adding that much of the war risk premium has now been priced out of the market.
International Monetary Fund Managing Director Kristalina Georgieva echoed that view, saying oil prices are likely to ease rather than plunge as countries replenish strategic reserves and maritime traffic gradually normalizes.
The reopening of the Strait of Hormuz is being closely monitored by global policymakers. Earlier in the conflict, Fatih Birol, executive director of the International Energy Agency, warned that the global economy could enter a “red zone” if the strait remained blocked beyond the end of June. Following the latest developments, Birol stressed the importance of completing negotiations within the 60-day timeline outlined in the memorandum.
Beyond the Middle East, investors are also weighing the impact of U.S. monetary policy on energy demand. Expectations have increased that the U.S. Federal Reserve could raise interest rates later this year to contain inflationary pressures. Higher borrowing costs could slow economic activity and reduce fuel consumption, creating an additional headwind for oil prices.
For now, however, the dominant driver remains the prospect of a diplomatic breakthrough between Washington and Tehran. If the agreement is upheld and shipping routes continue to reopen, global energy markets could see one of their most significant supply-side shifts since the conflict erupted, easing pressure on consumers and reducing one of the biggest geopolitical risks facing the world economy.