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By: Bruno Santos, Market Intelligence Analyst
Yesterday (June 6), the most active Brent contract closed sharply lower, reaching USD 101.27/bbl (-7.8%) after hitting an intraday low of USD 96.75/bbl before recovering some of the losses. WTI futures followed a similar trajectory, ending the day at USD 95.08/bbl (-7.1%).
The movement reflects growing optimism surrounding diplomatic negotiations between Washington and Tehran, with rumors circulating that the two nations are close to a memorandum of understanding to end the conflict. The prospect of reopening the Strait of Hormuz has significantly fueled bearish sentiment, leading to a reduction in the geopolitical risk premium accumulated since February.
This morning (June 7), Brent is trading at USD 99.11/bbl (-2.13%), with the decline further extended by reports from Middle Eastern sources suggesting that agreements have already been reached to ease the U.S. naval blockade of Iranian ports in exchange for the gradual reopening of the strait.
According to Axios, the memorandum of understanding between the U.S. and Iran is structured in three phases: formal cessation of the conflict, gradual reopening of the Strait of Hormuz, and a 30-day window for negotiations toward a comprehensive agreement. The proposal notably excludes key U.S. demands regarding Iran's nuclear program.
Why this matters: Initially, the signaling of a temporary agreement is enough to reduce the geopolitical risk premium in futures contracts, as the market interprets the suspension of hostilities as necessary for reopening the strait.
What to expect? The recent oil price movement mirrors the pattern observed on April 17, when Iran unilaterally announced the reopening of the Strait of Hormuz. At that time, however, the lack of a U.S. response to the measure led to the reimplementation of Iran's blockade, with price declines subsequently corrected in the following weeks.
Even if the Strait of Hormuz formally reopens, the effective resumption of oil and derivative flows faces significant operational constraints.
Why this matters: It’s worth noting that the market is pricing in a faster reopening scenario than the physical market can realistically handle. This creates a notable asymmetry, as any delays in flow normalization following a potential agreement could result in continued inventory declines, with part of the risk premium being reincorporated into prices, thereby limiting the extent of short-term price decreases.
What to expect? EIA inventory data will be monitored weekly as a key indicator of supply normalization speed. If inventory declines continue to accelerate even after an agreement, the market may revise upward the price floor during the transitional period.
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