Oil Sinks on Iran Peace Proposal

Oil and natural gas fell sharply as Iran evaluated a new proposal from the US to end the war that has lasted nearly 10 weeks.

Benchmark Brent crude slid nearly 8% to settle at $101.27 a barrel, while West Texas Intermediate dropped more than 7%. European natural gas declined as much as 14%.

Washington's one-page memorandum of understanding will, if Iran accepts it, lead to the gradual reopening of the Strait of Hormuz — a vital energy shipping route — and a lifting of the American blockade on Iranian ports, according to a person familiar with the matter. Traders are eager for traffic to resume through the strait, with its closure contributing to the biggest supply disruption in history.

Nothing has yet been agreed, the person said, and detailed negotiations on Iran's nuclear program will come later in the process. In comments to Fox News on Wednesday afternoon, Trump said he is "cautiously optimistic" about the proposal, adding that the US might be ending its war with Iran in as soon as a week.

"The market is trying to price in a peace agreement, but that's hard to do when the details keep changing," said Dennis Kissler, senior vice president for trading at BOK Financial Securities Inc. Thin volumes also mean it doesn't take much to move the price, he added.

News of the potential breakthrough — reported earlier by Axios — came just two days after clashes in the critical strait drove oil higher and raised fears that a US-Iran ceasefire was falling apart. Trump has faced increasing pressure to end the war, which the US started alongside Israel at the end of February. Earlier Wednesday, oil and gas pared losses after Trump said in a Truth Social post that if Iran doesn't agree to a US peace proposal, "the bombing starts."

Tehran is expected to send a response to the US proposal via mediator Pakistan in the next two days, the person familiar with the matter said. On Wednesday, Iran said safe passage through Hormuz would be ensured under a new protocol.

"Oil and petroleum product markets continue to fire long signals across all indicators, even after the large sell-off this morning," said Ryan McKay, senior commodity strategist at TD Securities. CTAs are expected to hold their positions if prices keep rising, but may trim them slightly if prices are flat or falling amid rising volatility, he added.

Crude has climbed by about 40% since the conflict started at the end of February, cutting off hundreds of millions of barrels of Persian Gulf oil from global markets. Flows through Hormuz have been constrained by a double blockade, with Tehran obstructing shipping while the US is stopping vessels from accessing Iranian ports.

On the physical front, government data released on Wednesday showed that US crude inventories continued to shrink, adding to concerns that the West's supply cushion is approaching its limit. US stockpile data is in the spotlight as overseas buyers grow increasingly reliant on American barrels to offset disruptions to Middle Eastern flows.

The heightened demand pushed exports of oil products to a record high last week, driven by robust demand for US diesel, according to the Energy Information Administration.

Ahead of Trump's expected summit with China's President Xi Jinping May 14 and May 15, China has also added its voice to global diplomatic pressure to wrap up the conflict. At a meeting in Beijing, China's Foreign Minister Wang Yi urged Iranian counterpart Abbas Araghchi to keep negotiating, saying "a resumption of hostilities is inadvisable."

Trump has repeatedly said significant progress has been made in negotiations with Iran to end the war, only for nothing substantial to emerge. On Tuesday, Iran's President Masoud Pezeshkian called the US position unrealistic, saying Tehran wouldn't "ultimately submit to its unilateral demands."

Still, any breakthrough in peace talks will take much longer to filter through to energy markets.

"When the Strait opens we do believe it will take half a year for oil to get back to normal," Equinor Chief Financial Officer Torgrim Reitan said on the company's quarterly earnings conference call. "For gas, it will take much longer."

The effective closure of Hormuz has choked off a fifth of the world's liquefied natural gas. While most of that fuel would normally go to Asia, the disruption threatens to intensify competition for a limited global pool of seaborne supply as Europe refills gas inventories before next winter.

Oil Prices

• WTI for June delivery fell 7% to settle at $95.08 a barrel.
• Brent for July settlement declined 7.8% to settle at $101.27 a barrel.