Oil prices dropped nearly 4 percent on Thursday on escalating indications that the United States and Iran may be nearing a new agreement on Iran's nuclear program. The news comes after world markets surged briefly recently over optimism for a de-escalation of the trade war and positive economic data.
Now, optimism is cooling in the face of geopolitical uncertainty, particularly as signs emerge that Iran could come back to the oil market more freely in the near future, flooding the market with an oversupply of crude.
Speaking on his current tour of the region, the U.S. president said that talks with Iran were going well, adding that the gap between the two parties was tiny. He added that Iran had "sort of" agreed to the major terms. If both parties sign off, the deal could contribute to altering the global dynamics of oil when Iran, a major oil producer, has been subject to strict export sanctions from the United States since 2018.
Iran is said to produce about 3 million barrels of oil a day. Relief from sanctions could help the country ramp up exports when an oversupplied market could be overwhelmed. That expectation has triggered an instantaneous price reaction. Brent crude plunged over $2 to just below $64 a barrel. Benchmark prices in the U.S. were also hammered, with a decline of over 3%.
Fresh data revealed a surprising increase in U.S. crude stockpiles, compounding the bearish news. Last week's 3.5-million-barrel increase surprised analysts, suggesting that even with the OPEC-led output cuts, supply may still be exceeding demand, especially if and when Iran begins exporting fully again. The news prompted another round of sell-offs in energy stocks and the sovereign bonds of oil-exporting countries like Nigeria and Angola.
European shares of energy companies fell by almost 2% in response, as did yields on government bonds, as investors sought shelter in safer assets. And the U.S. dollar eased back, while gold prices failed to gain a boost from increased market turmoil. Market watchers say the decline in oil prices is also ratcheting up deflationary fears across Europe, where anemic consumer demand has been a nagging problem.
Investors are now quietly awaiting updates on the U.S. economy, including retail sales and jobless claims, to determine whether it remains on solid ground. A weak performance could stoke fears of broader economic trouble, especially if oil prices continue to fluctuate.
Analysts caution that while diplomatic progress with Iran could help stabilize the region, it may also lead to short-term disruptions in energy markets. The global financial system, already fragile in the wake of recent shocks, will come under further stress if crude prices continue to jump unpredictably based on diplomatic shortcuts.
