Oil Prices Slide to Three-Month Low After US-Iran Pact to Reopen Strait of Hormuz

Oil prices dropped sharply on Monday, marking their lowest point in three months after a significant diplomatic breakthrough between the US and Iran. The two nations announced an initial agreement to end hostilities and resume shipping through the crucial Strait of Hormuz, a major artery for global oil trade.

By early Asian trading, Brent crude futures had plunged by $3.65 a barrel, or 4.2%, to settle at $83.68, while West Texas Intermediate tumbled by $4.13, about 4.9%, landing at $80.75. Both benchmarks have been on a downward trajectory, losing more than 3% in the prior session.

The deal, brokered with Pakistan's mediation, is expected to be formalized this Friday in Switzerland. US President Donald Trump declared the Strait would reopen "toll free," also announcing an end to the US naval blockade on Iranian ports that had previously choked off oil flows.

According to Iranian sources, the memorandum calls for the Strait's reopening within the next month under Tehran's supervision, a move that has investors rapidly reassessing the geopolitical risk premium that had been inflating oil prices amid the conflict.

Disruptions caused by the war had effectively halted oil and liquefied natural gas shipments through the Strait of Hormuz for over three months, knocking out supply for roughly 20% of the world's needs. The market now faces the challenge of gauging how swiftly Middle Eastern producers can bring damaged infrastructure back online and how quickly exports will gain momentum.

Experts note that oil flow restoration need not be complete to influence prices; reaching around 60-70% of pre-conflict levels could push markets back to a state of oversupply, influencing futures prices accordingly. The upcoming ceasefire period includes plans to negotiate a broader framework addressing longer-term issues.

European nations-the UK, France, Germany, and Italy-have expressed willingness to lift sanctions on Iran contingent on progress regarding Tehran's nuclear program, adding a layer of complexity to ongoing negotiations and market sentiment.

While the immediate price reaction reflects optimism, analysts caution that physical recovery from the conflict damage and the economic repercussions on oil-consuming countries will unfold over a longer horizon. Costs tied to infrastructure repair and economic strain from months of elevated energy prices are expected to linger even as the Strait reopens.

The oil market now waits to see how these developments translate into real-world supply dynamics and whether the agreement sustains momentum, reshaping an energy sector long unsettled by geopolitics.