Oil plunges, stocks jump on US-Iran peace deal

NEW YORK: Oil prices dropped towards US$80 a barrel and stocks rallied Monday after Washington and Iran reached a framework deal to end the Middle East war and reopen the Strait of Hormuz, spurring relief across global markets.

The announcement lifted the Dow to a fresh record, while the tech-dominated Nasdaq piled on more than three percent behind a nearly 20% surge in SpaceX following its impressive market debut Friday.

“A deal to reopen the Strait of Hormuz is sparking a broad rally on Wall Street to start the week,” said a note from Jose Torres of Interactive Brokers. “Risk-on sentiments are thriving… as traders effectively attempt to call an end to the US-Iran military conflict.”

The strait, through which roughly 20% of the world’s crude oil supply normally transits, had been effectively closed by Tehran after the US and Israeli strikes on Iran in late February, sending energy prices soaring.

The peace deal – in fact a “memorandum of understanding” – is due to be sealed with a signing ceremony in Switzerland on Friday, aimed at ending three months of conflict that have revived fears of a prolonged inflation spike.

Crude prices slumped nearly five percent, having surged above US$110 soon after the conflict began.

Trump administration officials had for weeks teased an impending potential accord. But until Sunday, not only was there no announcement, but last week saw revived strikes between the two sides as Trump threatened a reinforced crackdown.

The US president, soon after arriving in France for a summit hosted by French President Emmanuel Macron, nevertheless basked in the announcement of the deal, saying the strait would “completely open” from Friday.

But the content of the preliminary agreement, which follows weeks of fraught negotiations, remained unclear, with key items such as the future of Iran’s nuclear programme pushed back to a 60-day negotiation.

Oil industry watchers caution that market conditions will likely be tight for a period of weeks or months. Fresh US dDepartment of energy data showed strategic oil stockpiles sank last week to their lowest level since 1983.

Shipping groups warned Monday that it was too soon to safely resume sailing.

They “do not offer sufficient information regarding key aspects such as timings and safe routes,” Jakob Larsen, chief security officer at the shipping lobby BIMCO, said in a statement.

“We believe the security situation for the shipping industry remains volatile, and we still consider it very risky for ships to commence transits at this point,” he said.

While Middle East producers have an incentive to resume exports quickly, “physical flows are still likely to recover gradually rather than immediately, even if prices respond more quickly to signs that a credible reopening deal is in place,” said a note from Oxford Economics.

Still, the deal was enough to keep US equity indices solidly positive for the entire session. That followed gains across European and Asian equity markets, with Tokyo and Seoul both soaring around five percent.

Paris and Frankfurt rose while London’s FTSE 100 slipped, pulled down by heavyweight oil firms as energy prices sank.

Elsewhere, the US Federal Reserve and the Bank of England are expected to leave their main interest rates unchanged this week, preferring to wait and see if inflation risks will quickly subside.

It will be the first meeting chaired by Kevin Warsh, and comes after Trump’s repeated demands for rate cuts to boost the world’s biggest economy.

The Bank of Japan meanwhile is expected to increase borrowing costs, following a quarter-point rate increase by the European Central Bank last week.