Oil prices fall after announcement of U.S.-Iran agreement

How the oil market reacted

Oil prices fell after the news, even though the details of the agreement remain unclear. Brent dropped by more than 4% to around $83 per barrel, after ending the previous week at its lowest level in more than three months. Asian stock indexes, by contrast, rose sharply: one regional gauge gained more than 3%, while Japan’s Nikkei 225 was heading toward a record close.

Against the backdrop of discussions over possible rate hikes in Asian countries, the preliminary agreement could strengthen the position of supporters of a softer monetary policy stance at central bank meetings in Taiwan, Indonesia and the Philippines this week, Barclays economists said.

The deal is expected to ease fears of an immediate return to the conflict, which severely disrupted global energy markets and increased the risk of a new inflationary wave. It could also reduce the political pressure on Trump ahead of the midterm elections in November, as polls show the war is deeply unpopular among Americans.

At the same time, while celebrating the agreement, Trump told The New York Times in an interview on Sunday that he could resume military strikes if no deal is reached on Iran’s nuclear program.

Almost immediately after the announcement, the two sides began interpreting the deal differently, underscoring the difficulty of the negotiations ahead. Iran said that vessel traffic through the strait would be regulated by Iran and Oman. This could indicate that Tehran intends to retain a certain degree of control over the key maritime route.

What Iran will get

During the 60 days of negotiations, Iran intends to seek “the removal of all primary and secondary sanctions, as well as resolutions against Iran.” Such a move would require approval from the U.S. Congress, which imposed some of the toughest restrictions. It would likely trigger a sharp backlash from American Iran hawks, who fear that Trump may give up key leverage.

The issue of financial incentives for Tehran also remains unclear. A senior U.S. official who spoke to reporters on Friday said the two sides had discussed a model under which Iran would receive economic bonuses as it met a set of U.S. demands. Another possible element is that Tehran could receive assistance in rebuilding after U.S. and Israeli strikes on thousands of sites across the country.

Distrust between the U.S. and Iran remains high, and serious doubts persist about the sides’ ability to reach a broader agreement. Israel remains another risk factor: the government of Prime Minister Benjamin Netanyahu put the signing at risk at the last minute by launching new strikes on Lebanon.

Inside the U.S., Trump could face harsh criticism from supporters of a more aggressive approach toward Iran. They fear that the president is effectively postponing decisions on the very issues that led to the war in the first place, including Tehran’s nuclear capabilities and ballistic missile program.

Iran, for its part, is demanding access to billions of dollars frozen in overseas bank accounts, as well as long-term sanctions relief. Several European countries, including the UK, France, Germany and Italy, said on Sunday that they were ready to lift relevant restrictions if a final deal is reached.

The announcement was the result of several weeks of indirect negotiations between Washington and Tehran, which continued after a ceasefire came into force in early April. Intermittent clashes repeatedly threatened to derail diplomatic efforts to end the war.

Iran closed the Strait of Hormuz shortly after U.S. and Israeli strikes triggered the war. This disrupted a route that normally carries around a fifth of the world’s oil and liquefied natural gas supplies. Vessel traffic through the key chokepoint at the entrance to and exit from the Persian Gulf remains heavily restricted, with crossings amounting to only a small fraction of prewar levels.

As a reminder, the war in Iran could become the main topic of the G7 summit.

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