Market News

(Bloomberg) -- Oil tumbled to a fresh three-month low on gathering expectations that a US-Iran deal to reopen the Strait of Hormuz waterway will unleash a wave of supply, loosening the global crude market.

Benchmark Brent futures steadied near $79 a barrel, after dropping as much as 1.1% earlier, while West Texas Intermediate was above $76. The interim pact, which is due to be signed on Friday, offers Tehran broad financial incentives, including the right to sell its oil immediately.

Shipowners look to be repositioning vessels ahead of any opening. Two tankers that were headed toward Africa have U-turned in the Indian Ocean, switching destinations to the Middle East, vessel-tracking data show.

The market’s rapid loosening is reflected in Brent’s much narrower prompt spread, with the difference between the benchmark’s two nearest contracts at just 14 cents a barrel in backwardation on Wednesday. While that remains a bullish pattern — with the nearer price above the later-dated one — the gap had closed at $9.65 in early April on concerns about near-term supplies.

Crude prices have retreated sharply in recent weeks as moves to end the war between Washington and Tehran are seen easing tightness in global energy markets. Producers, shippers and traders are now assessing whether the agreement will prove to be durable, and how long it will take for vessel transits of the Hormuz chokepoint to be revived in earnest.

“Most traders still believe US naval operations will likely be escorting for the first few weeks, and mine-sweeping ships will also be present, which will slow the flow of traffic,” said Dennis Kissler, senior vice president for trading at BOK Financial Securities Inc. “Still, the futures market is always looking in the distance, and for now the odds are increasing that oil will be moving.”

While technical details are still being finalized and some language may be changed, a 14-point draft memorandum offers the clearest picture yet of the deal, which will pave the way for 60 days of talks aimed at formally ending the war and imposing strict new limits on Iran’s nuclear program.

The points include a requirement for Tehran to ensure the movement of merchant ships and for the US to lift its own blockade of Hormuz. The narrow waterway connects the Persian Gulf to the Indian Ocean, and in peacetime it used to carry about a fifth of global oil supplies.