Oil declines on US-Iran talks progress

USOIL analysis

After signing a Memorandum of Understanding under which they agreed on a ceasefire, the reopening of the Strait of Hormuz and 60 days of negotiations on stickier subjects, the US and Iran held their first talks on Sunday. Mediators Qatar and Pakistan issued a joint statement noting a "positive and constructive atmosphere" and "encouraging progress", including a mechanism for further technical talks. The negotiating parties also agreed on a "de-confliction cell" to support the MoU's provision for the termination of military operations in Lebanon. ^[1]

US Vice President Vance spoke of "great progress" and expressed expectations for additional talks, while downplaying the Lebanon hostilities, saying these things "are always a little bit messy" ^[2]. Iranian Foreign Minister Abbas Araghchi also noted "major progress" but warned that the agreed deconfliction cell will be the "1st real test". ^[3]

This progress has sparked fresh optimism for a restoration of flows through the Strait of Hormuz, reviving oil glut talk just as demand destruction takes hold. The IEA sees a surplus in 2027 while projecting a drop in demand for the current year ^[4]. The prolonged spike in energy prices and a higher-for-longer shift by central banks to combat inflation are exacerbating economic headwinds and hurting crude consumption. This shift includes the Fed, which struck a hawkish tone and cemented rate hike bets, pushing the USDOLLAR higher and further weighing on oil prices.

Following three straight weeks of losses, USOil drops today on positive signals from the US-Iran negotiations. With supply-demand dynamics shifting in an unfavourable direction, oil prices remain vulnerable to deeper declines. Nonetheless, USOil could push back, reclaim the EMA200 and negate the downside momentum.

Despite further progress in Sunday's negotiations, the process is likely to prove bumpy and sustain uncertainty. Any backtrack or fresh ceasefire breaches could reignite the risk premium and push oil prices higher. President Trump warned Tehran to stop its proxies from "causing trouble" in Lebanon or the US will "hit Iran very hard again" ^[5]. The Lebanon ceasefire remains in doubt after Israel carried out strikes on Saturday following Hezbollah attacks. ^[6]

In response, Iran declared the Strait of Hormuz closed according to local media ^[7], although US CENTCOM insisted this crucial transit corridor "remained intact" on Saturday ^[8]. Even with the Strait open, supply could take months to normalise, with CEOs of major energy companies alluding to such prospects recently. Exxon Mobil's CEO estimated one to two months during the May 1 earnings call ^[9], while the CEO of Saudi Aramco said rebalancing could extend to 2027 if the reopening of the Strait takes further weeks ^[10]. Meanwhile, the market has already tightened and the IEA expects a deficit this year.