Oil prices sink further as Trump signs deal to reopen Hormuz ~ EconomyLens.com

Hong Kong (AFP) – Oil prices tumbled again Thursday after US President Donald Trump and his Iranian counterpart signed off on a deal to end their war and reopen the Strait of Hormuz. The news boosted optimism for a lasting peace between the two nations after more than three months of war that has rattled energy markets and fueled a fresh spike in inflation.

However, the upbeat mood on trading floors was tempered by expectations that the US Federal Reserve will hike interest rates before year’s end, after its new boss held his first policy meeting and acknowledged that “persistently high prices are a burden for the American people”. Trump put his signature to the memorandum of understanding in Versailles after a G7 summit, telling reporters: “Just signed it.” Iranian foreign ministry spokesman Esmaeil Baqaei, quoted by state news agency IRNA, said the document “was finalized with the signatures of the presidents”.

All eyes are now on the strait, through which a fifth of world oil normally passes and which Tehran effectively closed after the United States and Israel launched their war on Iran on February 28. “As a first step, the Islamic Republic of Iran will instantly reopen the Strait of Hormuz and the United States of America will immediately lift the naval blockade,” Pakistan’s Prime Minister Shehbaz Sharif, whose officials mediated the agreement, said on X. The deal will see Washington commit to immediately waive oil sanctions and facilitate the release of a $300 billion reconstruction fund, while Tehran agrees to dilute its enriched uranium as talks on a longer-term agreement are held.

Crude fell more than three percent Thursday, extending the losses sustained since news broke at the weekend. Both main contracts have plummeted more than 15 percent since last week, when talk of an agreement began swirling. “A signed MOU and a faster path toward reopening the Strait of Hormuz should pull some of the panic premium out of crude,” wrote Stephen Innes at SPI Asset Management. “That matters because oil was not just trading war risk. It was trading the possibility that reserve drawdowns and blocked Gulf flows would create an energy cliff.”

Equities were mixed as they struggled to maintain the positive momentum seen this week. Seoul was again at the forefront of the gains, surging more than two percent and ploughing past 9,000 points for the first time thanks to another surge in chip titans Samsung and SK hynix as the AI boom continues apace. “South Korea supplies around 80 percent of the world’s memory chips, and artificial intelligence is expected to continue growing for at least another decade,” Kim Dae-jong, a professor at Sejong University, told AFP. “Semiconductors account for roughly half of South Korea’s industrial output, and this is seen as the biggest reason why Kospi broke through the 9,000-point mark.”

Tokyo finished above 71,000 for the first time, while Singapore, Taipei, Mumbai, and Manila also rose. Hong Kong, Shanghai, Sydney, Wellington, Bangkok, and Jakarta fell along with London. Paris and Frankfurt rose. The mixed performance followed the Fed’s latest policy meeting that saw it hold rates as expected but indicated it could hike in the next six months. The gathering was the first for new boss Kevin Warsh, who flagged the fact that inflation has been well above the bank’s two percent target for years but vowed to “deliver price stability”.

“Persistently high prices are a burden for the American people, but the recent past need not be prologue,” he said after the meeting at which he also wanted wide-ranging reforms at the bank. Warsh was appointed by Trump, who has launched an unprecedented assault on the Fed’s independence and called previous boss Jerome Powell incompetent for not cutting rates enough. Analysts pointed out that the Fed’s post-meeting statement did not make mention of an easing bias, as it had done previously. The fact there was more emphasis on prices rather than jobs was also noted. Data this month has shown inflation at a three-year high, while the labor market remains healthy.

“While there is no suggestion the Fed’s dual mandate has shifted away from unemployment as well as price stability, markets have been left with a view (that) the emphasis appears to have shifted to the latter for now,” wrote National Australia Bank’s Gavin Friend.