Oil drops below $80, stocks gain on US-Iran peace deal optimism

Oil prices dropped below $80 a barrel Tuesday on optimism over the promised reopening of the Strait of Hormuz, easing inflation pressures on global economies even though traders are eyeing the risk of Iranian “service fees” on ships transiting the strait.

Oil hit a three-month low as Brent North Sea crude, the international benchmark, dropped 4.0 percent to $79.87 a barrel, dipping below $80 for the first time since early March, before edging back up to $80.52.

The main US oil contract, West Texas Intermediate, slid 4.5 percent to $77.16 a barrel before rising to the brink of $78.

US President Donald Trump said the Strait of Hormuz would “completely open” once Washington and Iran sign their peace agreement on Friday in Switzerland.

Iranian media reported that three oil tankers and two cargo ships had already passed through.

Wall Street was cautious as the Dow was up just 0.6 percent at 51,958.08 points half an hour into trading, while the broader S&P 500 was up just 0.1 percent and the tech-heavy Nasdaq added 0.3 percent.

London and Paris had risen 0.7 percent two hours out from the close of trading while Frankfurt was just 0.2 percent in the green, while Asia ended mixed.

“Although the deal has not been formally signed, there already appears to be a peace dividend for markets,” said Kathleen Brooks, research director at trading group XTB.

“We are seeing European markets play catch-up with the US, and this could continue, as some European indices remain below their pre-war levels,” including London’s FTSE 100 index, she added.

Tehran blockaded the strait after the US and Israel launched their war against Iran on February 28, prompting Washington to later halt shipping to and from Iranian ports.

Despite the falloff in oil prices analysts warned that market conditions could remain tight for weeks or even months after the end of the conflict.

“Oil prices, for now, are hovering at the lowest level in two months... but it’s still trading at a premium compared to pre-conflict levels, demonstrating the ongoing uncertainties about supplies,” said Susannah Streeter, chief investment strategist at Wealth Club.

US Energy Department data meanwhile showed that America’s strategic oil stockpiles sank last week to their lowest level since 1983 -- indicating sustained demand to rebuild them even if the Mideast conflict ends.

Focus this week is also on a wave of central bank decisions.

The Federal Reserve on Wednesday is set to leave interest rates unchanged, despite inflation at a three-year high. The Bank of England is also expected to stand pat.

The yen was little changed after the Bank of Japan on Tuesday raised interest rates to their highest level since 1995.

Tech stocks received a boost from another blockbuster performance by Elon Musk’s SpaceX, which was up almost 13 percent -- and briefly almost 20 percent -- for a second session in a row after listing at the end of last week.

European stock markets extended gains and oil prices fell further on Tuesday, buoyed by the US-Iran peace deal and the expected reopening of shipping through the Strait of Hormuz.

London, Paris and Frankfurt stock markets all climbed around 0.5 percent in midday deals, after a mixed session in Asia.

“Although the deal has not been formally signed, there already appears to be a peace dividend for markets,” said Kathleen Brooks, research director at trading group XTB.

“We are seeing European markets play catch-up with the US, and this could continue, as some European indices remain below their pre-war levels,” including London’s FTSE 100 index, she added.

US President Donald Trump said ships were moving through the Strait of Hormuz and the key route would be “completely open” by Friday, while Iranian media reported that three oil tankers and two cargo ships had already passed through.

Tehran blockaded the strait after the US and Israel launched their war against Iran on February 28, prompting Washington to halt shipping to and from Iranian ports.

World oil prices fell more than two percent Tuesday after Monday’s sharp drop, leaving international benchmark Brent North Sea crude trading at around $81 a barrel.

But analysts warned that market conditions could remain tight for weeks or months.

US Energy Department data meanwhile showed that strategic oil stockpiles sank last week to their lowest level since 1983 -- indicating sustained demand to rebuild them even if the Mideast conflict ends.

“Oil prices, for now, are hovering at the lowest level in two months... but it’s still trading at a premium compared to pre-conflict levels, demonstrating the ongoing uncertainties about supplies,” said Susannah Streeter, chief investment strategist at Wealth Club.

Focus this week is also on a wave of central bank decisions.

The Federal Reserve on Wednesday is set to leave interest rates unchanged, despite inflation at a three-year high. The Bank of England is also expected to stand pat.

Agencies