Oil prices fell sharply on Thursday after the United States and Iran signed an agreement aimed at ending their conflict and reopening the Strait of Hormuz, a key global shipping route for crude oil exports.
The breakthrough fuelled hopes of a lasting peace after more than three months of hostilities that had unsettled energy markets and heightened concerns over inflation.
The agreement was signed following the G7 summit in Versailles, with both Washington and Tehran confirming that the memorandum of understanding had been finalised by their respective presidents.
Attention has now turned to the Strait of Hormuz, through which around one-fifth of the world’s oil supply normally passes. The waterway has faced major disruption since the outbreak of conflict earlier this year.
Pakistan, which helped mediate the talks, said the deal would see Iran immediately reopen the strait, while the United States would lift its naval blockade. The agreement also includes the easing of oil sanctions and the creation of a reconstruction fund, while Iran has agreed to dilute its enriched uranium as negotiations continue on a longer-term settlement.
The prospect of oil supplies returning to global markets pushed crude prices lower, extending losses recorded earlier in the week. Benchmark oil contracts have now fallen more than 15 per cent since reports of a possible agreement first emerged.
Analysts said the deal had removed much of the geopolitical risk premium that had been supporting oil prices amid fears of prolonged supply disruptions.
Despite the positive developments, investor sentiment remained cautious as attention shifted to US monetary policy.
Markets were also assessing comments from Federal Reserve Chair Kevin Warsh following the central bank’s latest policy meeting. While interest rates were left unchanged, Warsh signalled that persistent inflation remained a concern and suggested further rate increases could still be considered later this year.
Asian stock markets delivered a mixed performance, with gains in Tokyo, Seoul and Singapore offset by losses in Hong Kong, Shanghai and Sydney.
Warsh stressed that bringing inflation back towards the Federal Reserve’s two per cent target remained a priority, warning that elevated prices continue to place pressure on households.
Investors will now be closely watching both the implementation of the US-Iran agreement and future signals from the Federal Reserve as markets weigh improving geopolitical conditions against the prospect of tighter monetary policy.