Oil prices fell during Thursday's Asian deals as markets reacted to an interim agreement between the United States and Iran aimed at ending the conflict between the two nations, reopening the Strait of Hormuz and paving the way for the return of Iranian oil exports.
By 2:50 pm AEST (4:50 am GMT), Brent crude futures dropped $1.62, or 2%, to US$77.93 per barrel, while U.S. West Texas Intermediate crude fell $1.83, or 2.4%, to $74.96 per barrel.
The declines extended losses from earlier in the week as traders reassessed supply risks following the signing of a 14-point memorandum of understanding between Washington and Tehran.
The agreement establishes a 60-day negotiation period and includes provisions for toll-free passage through the Strait of Hormuz, one of the world's most important oil and gas shipping routes.
The memorandum also calls for commercial traffic through the waterway to return to full capacity within 30 days.
The renewed selling came despite comments from U.S. President Donald Trump on Wednesday, when he warned that military action could resume if negotiations fail.
"Just in case you have any question, we'll be giving this out, so you can read it, and you can see," Trump said of the memorandum. "If it doesn't get done in 60 days, that's all right. We go back to bombing. I don't want to do that, because it's so good, but we might have to, because we're never going to let them have a nuclear weapon."
Market participants are increasingly focused on the potential for a significant increase in oil supply if the agreement is successfully implemented and sanctions on Iranian crude exports are eased.
Analysts at ANZ said a draft version of the agreement had raised concerns about the prospect of additional crude entering global markets.
"A draft version reportedly circulating foresees an immediate reopening of the Strait of Hormuz, along with immediate sanction waivers for Iranian oil.
"That has sparked concern that a flood of oil will hit the market. However, there are considerable risks to this scenario.
"There remain concerns that shipowners will be reluctant to send oil tankers back into the Persian Gulf while there is a risk that the deal falls over. Then there is the clean up of sea mines that could take weeks or months to complete.
"In the meantime, the market continues to rely on lower demand and inventories to keep its balance."
While the agreement marks a major diplomatic breakthrough, it leaves several key issues unresolved. The memorandum defers more contentious matters, including the future of Iran's nuclear programme, to negotiations scheduled over the next 60 days.
The deal also requires the United States and its partners to develop a US$300 billion economic recovery package for Iran as part of a broader final settlement.
Energy markets are now weighing the prospect that a supply crunch in 2026 could eventually give way to excess production if Middle Eastern exports return to normal levels.
The International Energy Agency (IEA) warned in its monthly oil market report that a successful reopening of the Strait of Hormuz and the return of Iranian exports could create a substantial oversupply next year.
The agency forecasts global oil supply will exceed demand by 5.05 million barrels per day in 2027 as Middle Eastern production and exports recover.
