Oil slips over 8% on US‑Iran truce report as inventories hit multi‑year lows

Oil prices face renewed downward pressure because the truce between the US and Iran seems to be stable, even after the recent heightened tensions in the Persian Gulf.

Oil prices hit two-week lows on Wednesday, extending their decline following a report from Axios that indicated Washington was nearing a single-page framework agreement with Iran to conclude the war.

At the time of writing, the Brent contract on the Intercontinental Exchange was at $101 per barrel, down 8.1%, while the West Texas Intermediate crude was at $92.86 a barrel, down 9.2% from the previous close. 

Both benchmarks were poised for their most significant daily drop, in both percentage and absolute terms, since mid-April, following a roughly 4% decline in the previous session.

The possibility of an agreement between the parties is closer than it has been since the war began, according to a report by Axios. 

The US is currently awaiting Iranian responses on several key points within the next 48 hours. Iran had previously stated that it would only accept an agreement that is both fair and comprehensive.

Strait of Hormuz disruptions and future volatility

Meanwhile, the conflict's impact on energy markets continues, with halted marine traffic through the Strait of Hormuz since the start of the war in February leading to crude oil supply losses. 

This disruption has caused prices to rise, with Brent crude reaching its highest level since March 2022 last week.

In an effort to assist stranded ships exiting the strait, the US military reported on Monday that it destroyed several Iranian small boats.

The market experienced a further sell-off in early morning trading today, following US President Donald Trump's decision to pause "Project Freedom" while the US pursues a deal to end the war with Iran.

Trump described the progress towards a "complete and final agreement" as "great."

The rise in tensions between the US and Iran was a consequence of implementing "Project Freedom," which is Trump's strategy for escorting commercial vessels through the Strait of Hormuz after they have become stranded in the Persian Gulf.

“Looking ahead, developments in the Middle East will remain key to price direction,” Warren Patterson, head of commodities strategy at ING Economics, said in a note. 

Restoring normal oil flows via the Strait of Hormuz is essential.

The current disruption of approximately 13 million barrels per day in supply is being primarily managed through inventories, which are visibly and quickly diminishing, according to ING data.

US inventory data signals constrained product markets

Meanwhile, US crude oil inventories decreased significantly over the last week, falling by 8.1 million barrels, according to the American Petroleum Institute (API). 

The decline was mirrored in refined products, with gasoline stocks dropping by 6.1 million barrels and distillate stocks by 4.6 million barrels.

US commercial crude oil inventories are currently at a comfortable level of 459 million barrels, which is slightly more than 1% above the seasonal five-year average. 

Investors will monitor the release of the more widely anticipated Energy Information Administration (EIA) inventory figures later on Wednesday. 

“Yet this can change quickly, particularly if we continue to see record US crude oil exports,” Patterson said. 

US refined product inventories are notably constrained ahead of the EIA release. 

Specifically, US gasoline stocks are currently just over 222 million barrels.

This marks a decrease from 259 million barrels in early February and represents the lowest level for this period of the year since 2014. 

Furthermore, distillate stocks are below 104 million barrels, which is the lowest level recorded for this time of year since 2005.

“Tighter product markets should continue to see refined product cracks trading at elevated levels,” Patterson added.