Oil Prices Decline as US-Iran Deal Fuels Stock Market Rally

The Market Response to Diplomatic Breakthrough

Oil prices have dropped following the United States and Iran's signing of an interim peace agreement, resuming a slide interrupted by US President Donald Trump's warning that he could restart his military campaign. Brent crude fell 2.3 percent on Thursday in Asia, returning the international benchmark to near where it was 24 hours previously.

Stock Markets Rally on Optimism

Shrugging off losses on Wall Street overnight, Asian stock markets rallied on renewed optimism for an end to nearly four months of disruption to global energy supply chains. Japan's benchmark Nikkei 225 and South Korea's Kospi both hit all-time highs, gaining more than 2 percent and 1.7 percent, respectively. Taiwan's Taiex rose as much as 1.3 percent, while Hong Kong's Hang Seng Index bucked the trend, dropping 1.7 percent.

The Financial Impact of the Agreement

Brent futures for delivery in August stood at $77.73 as of 05:30 GMT, only about 7 percent higher than before the US and Israel launched their war on Iran on February 28. After several days of declines, Brent briefly spiked above $81 a barrel on Wednesday after Trump warned that the US could "go right back to dropping bombs" on Iran if it doesn't "behave".

Terms of the US-Iran Memorandum of Understanding

Pakistani Prime Minister Shehbaz Sharif, who mediated the negotiations between Washington and Tehran, said on Wednesday that the US-Iran memorandum of understanding (MoU) had entered into force with "immediate effect". Sharif said Iran would "instantly reopen" the Strait of Hormuz and the US would "immediately" lift its naval blockade of Iranian ports, though it was not immediately clear if the announcement had any effect on boosting maritime traffic in the critical waterway.

Continuing Challenges to Global Supply Chains

Shipping in the strait has been reduced to a fraction of peacetime levels due to the threat of Iranian missiles, drones and mines, as well as the US blockade. The blockage has resulted in an estimated daily shortfall of 14 million barrels in the global oil market, according to the International Energy Agency (IEA). While more than 500 vessels are estimated to be waiting to exit the Gulf through the strait, shipping companies have expressed concern about the lack of clarity on how to ensure the safety of their vessels and crews in the channel.

Market Sentiment vs. Physical Reality

Fabien Yip, a market analyst at IG in Sydney, said that while markets have responded to the MoU with optimism, the relief is "largely priced in" as practical issues such as the backlog of vessels in the Gulf and mine clearing operations must still be resolved. "There is a notable divergence between sentiment and physical supply – production ramp-up and logistics normalisation will take time," Yip told Al Jazeera. The Baltic and International Maritime Council (BIMCO) has advised shipowners to continue doing thorough risk assessments and appeal to all parties to put the safety of seafarers first.