Oil prices fall, but risks remain; why the 60-day window couldn't stabilize the market?

TL;DR

• International oil prices continued to decline on June 23, with the resumption of crude oil traffic through the Strait of Hormuz acting as a short-term source of pressure.
• The interim US-Iran arrangement includes an approximately 60-day negotiation window, leading to a阶段性 easing of restrictions on Iranian oil sales.
• The SPR remains at its lowest level since 1983. If negotiations collapse or shipping is disrupted, the downside for oil prices will be constrained.

On June 23, international oil prices continued to face downward pressure. Intraday market data around the time of writing showed that Brent crude and WTI crude were slightly lower, extending the significant decline from the previous trading session. Market focus has shifted from military risks in the Middle East to the actual supply changes following the interim US-Iran arrangement. According to a Reuters report, two crude oil tankers, carrying a combined total of slightly less than 2 million barrels of crude, passed through the Strait of Hormuz on Monday, indicating that traffic through this critical waterway is resuming. For the oil market, whether tankers can navigate and whether Iranian oil can be sold have a more direct impact on short-term prices than diplomatic rhetoric.

Oil Prices Initially Priced in "Strait Navigability"

The direct trigger for this round of oil price decline was the resumption of traffic through the Strait of Hormuz.

The Strait of Hormuz is one of the world's most critical maritime chokepoints for oil. During the earlier tense period, the market feared that shipping disruptions would quickly impact Middle Eastern crude exports, leading to supply risks being factored into prices. Now, with two oil tankers having re-passed through the strait, traders have received a clearer signal of reality: at least part of the crude oil transportation is resuming.

This explains why oil prices have not shown a significant rebound on June 23, after a decline of approximately 4% in the previous trading session. Intraday quotes show Brent crude hovering around $77 per barrel and WTI fluctuating near $74 per barrel. The market is currently pricing in the fact that "the worst-case scenario has not materialized for now."

However, oil prices have only retreated, not fully returned to the calm state before the conflict. The resumption of traffic through the strait can reduce short-term panic, but it cannot eliminate the possibility of a breakdown in agreements, renewed shipping blockages, or changes in sanction arrangements. For the crude oil market, the current situation is more akin to a cooling down of supply disruption risks rather than the elimination of Middle Eastern risks.

A 60-Day Window Temporarily Loosens Iranian Oil Sales

Another factor contributing to lower oil prices is the window left for Iranian oil sales under the interim US-Iran arrangement.

According to the content of the US-Iran Memorandum of Understanding disclosed by Axios, the arrangement includes an approximately 60-day nuclear negotiation window and permits Iran to sell oil during this period. Reuters, citing a senior US official, reported that Iran could begin selling oil and fuel immediately after the agreement was signed.

This has a direct impact on the global oil market. Previously, the market feared two things happening simultaneously: disruption of the Strait of Hormuz on one hand, and continued restrictions on Iranian supply on the other. If the shipping lane recovers and restrictions on Iranian oil sales are temporarily eased, the most severe supply-side scenario is delayed.

However, the "60-day" timeframe itself is a limiting condition. It indicates that the current arrangement remains a negotiation window, not a final agreement. If Washington and Tehran cannot establish a more stable arrangement within this window period, issues like Iranian exports, sanction enforcement, and shipping security could resurface and impact oil prices once the exemptions or temporary permissions expire.

Therefore, the market remains cautious about further oil price declines. The short-term sales window can dampen panic, but it does not guarantee the long-term restoration of Iranian exports or ensure the Strait of Hormuz remains continuously accessible.

Political News Could Still Interrupt the Oil Price Decline

The current volatility in oil prices remains highly dependent on political news.

The interim US-Iran arrangement has improved short-term sentiment, but mutual trust between the two sides is not solid. Documents disclosed by Axios and reports by Reuters indicate that the core of the agreement is still to buy time for subsequent nuclear negotiations. In other words, the current outcome is closer to "letting the oil flow first" rather than resolving the long-standing differences between the US and Iran.

The earlier strong rhetoric surrounding the Strait of Hormuz has already shown the market the sensitivity of this risk. As soon as new military threats, shipping restrictions, or signals of negotiation breakdowns emerge, crude oil prices are likely to reincorporate a risk premium. For traders, the most important thing right now is not how optimistic the statements are, but whether tanker passages and Iranian sales can continue consistently.

This also explains the contradictory performance of oil prices: supply-side signals have eased, causing prices to fall; yet the decline has not fully erased previous gains because the temporary arrangement has not yet become a long-term guarantee.

Low SPR Levels Limit US Emergency Buffer

Amidst the oil price decline, the US Strategic Petroleum Reserve (SPR) remains at multi-year lows.

Public reports, citing data from the US Energy Information Administration, state that as of the week ending June 12, the US Strategic Petroleum Reserve held approximately 340 million barrels, its lowest level since 1983. While this figure is not the primary driver of the current oil price decline, it delineates a risk boundary for the market: if the Strait of Hormuz is disrupted again, negotiations collapse, or commercial inventories simultaneously decline, the strategic buffer available for the US to deploy is thinner than in the past.

A Reuters survey also indicated that the market expects US inventories of crude oil, distillates, and gasoline to have all fallen last week. If subsequent inventory data confirms this decline, the downside space for oil prices could be limited, especially given that Middle Eastern risks have not been completely resolved.

Currently, the clearest short-term logic for the oil market is that the resumption of Strait of Hormuz traffic and the window for Iranian oil sales have depressed supply panic. However, the 60-day negotiation deadline, the lack of mutual trust between the US and Iran, and the low level of US strategic reserves make it difficult for the market to interpret this round of oil price declines as a complete clearing of risks. As long as any disturbance re-emerges on either the shipping or negotiation front, oil prices could react quickly.