Oil Extends Gains as Iran Nears Oman Shipping Deal

Strait of Hormuz Deal Fuels Oil Rally

Brent crude futures surged past $85 per barrel, climbing 1.8% to $85.70, while West Texas Intermediate (WTI) advanced 2.1% to $81.95, as reports emerged of a prospective agreement between Iran and Oman regarding shipping management in the Strait of Hormuz. This marks a third consecutive day of gains for both benchmarks, driven by geopolitical risk premiums and tightening supply expectations.

The proposed deal, details of which remain scant, aims to streamline and potentially regulate maritime traffic through the world's most critical oil transit chokepoint. Market participants are closely monitoring the developments, anticipating that any formalization could either reduce perceived transit risks or, conversely, introduce new complexities for commercial vessels navigating the strategic waterway.

Market Impact

Brent crude touched an intraday high of $86.05, its highest level since mid-May, before settling at $85.70 on ICE Futures Europe. WTI futures, trading on the New York Mercantile Exchange, reached $82.10, their strongest performance since April. Trading volumes for crude oil futures on ICE Futures Europe were up 15% above their 30-day average, signaling robust market activity.

This three-day rally has erased losses from early June, bringing Brent back to levels last seen before the OPEC+ meeting where a gradual phase-out of some voluntary cuts was announced. The current geopolitical risk premium embedded in prices is estimated to be around $3-$5 per barrel, a level not consistently observed since Red Sea shipping attacks intensified in late 2023. The Strait of Hormuz, responsible for approximately 20% of global oil supply and a significant portion of liquefied natural gas (LNG) traffic, remains a focal point for supply security concerns.

Shipping rates for Very Large Crude Carriers (VLCCs) and Suezmax tankers saw noticeable spikes following the news. The benchmark TD3C route (Middle East to China) for VLCCs rose by 4% to approximately $35,000 per day, while Suezmax rates from the Middle East to the Mediterranean climbed 5.5% to $28,500 per day. This reflects increased caution among shipowners and charterers regarding potential operational changes in the region.

The energy sector outperformed the broader market, with the $XLE ETF, which tracks U.S. energy companies, rising 1.5%. This compares to a more modest 0.3% gain for the S&P 500 index. Shares of major oil producers like Exxon Mobil ($XOM) and Chevron ($CVX) climbed 1.2% and 1.8% respectively, while smaller exploration and production companies saw even larger percentage gains. The uncertainty also prompted a modest flight to safety, with gold futures ($GC) inching up 0.2% to $2,335 an ounce, while the $USD/JPY pair saw reduced volatility.

What Analysts Are Saying

Goldman Sachs analysts noted that while details are sparse, any formal agreement between Iran and Oman concerning the Strait of Hormuz could reduce the immediate risk of naval confrontation, potentially lowering the geopolitical risk premium currently embedded in oil prices by $1-2 per barrel in the short term, assuming the deal fosters stability. They emphasized that a clear, transparent framework for maritime passage would be a net positive for global supply chain predictability.

Conversely, J.P. Morgan strategists warned that if the deal grants Iran greater oversight or influence over transit protocols, it could introduce new layers of bureaucracy or even de facto tolls, which would ultimately increase shipping costs and potentially tighten supply. They suggested such an outcome could push prices higher by $3-4 per barrel in the medium term, urging close scrutiny of the fine print of any such agreement for its practical implications on commercial shipping.

Energy Aspects highlighted that the market's initial reaction is primarily driven by speculation rather than concrete facts, given the lack of official details. They stated, "The key unknown is whether this deal represents a genuine de-escalation of tensions or a formalization of Iranian influence over a critical international waterway. Until clarity emerges, volatility will remain elevated. Our base case suggests a minor positive for supply security, but the risk of misinterpretation, leading to further price swings, is significant."

What to Watch

Investors should meticulously monitor official announcements from Tehran and Muscat for precise terms of the shipping deal, including enforcement mechanisms, dispute resolution processes, and any implications for navigation rights or transit fees. A joint press conference or an official communiqué outlining the specifics is anticipated within the next 7-10 days, which will be critical for market direction.

The next Joint Ministerial Monitoring Committee (JMMC) meeting of OPEC+, expected in late July, will offer insights into current production compliance and any potential adjustments to output policies. This could either reinforce or counteract the impact of the Hormuz deal, especially if OPEC+ members decide to adjust their supply targets in response to evolving geopolitical dynamics.

Weekly U.S. crude inventory reports from the American Petroleum Institute (API) and the Energy Information Administration (EIA) on Tuesday and Wednesday, respectively, will provide crucial demand-side indicators. A significant draw in crude stocks could further support prices, while an unexpected build could temper recent gains by signaling weaker-than-anticipated demand or higher domestic supply.

For Brent crude, the immediate resistance level stands at $87.50, a breach of which could open the path towards $90.00 a barrel, reflecting increased bullish sentiment. Support is identified at $84.20, with a break below potentially signaling a pullback towards $82.00. WTI faces immediate resistance at $83.00, with support found at $80.50, which traders will closely watch for signs of price consolidation or reversal.