How Trump’s surprise Iran remarks sent oil prices tumbling

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Oil prices sank around 10 per cent on Monday after US President Donald Trump suddenly ordered a halt to strikes on Iranian energy infrastructure after citing “very good” talks with Tehran.

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Despite Iran’s foreign ministry denying any such negotiations, Trump’s statement offered relief to crude prices, which have surged since the outbreak of the Middle East war.

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AFP explains why.

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– Energy market overheating –

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Oil and gas prices have soared following the United States and Israel unleashing strikes on Iran on February 28, triggering retaliation from Tehran.

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International benchmark Brent North Sea crude has since jumped more than 40 percent, while European gas prices have rocketed over 75 percent.

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Energy exports from the Gulf — including Saudi Arabia, Iraq and Qatar — have been disrupted by the near-paralysis of the Strait of Hormuz, a vital shipping route through which around 20 percent of the world’s oil and liquefied natural gas normally passes.

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The global economy is under “major threat” from the resulting energy crisis, International Energy Agency chief Fatih Birol said Monday.

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The war has removed around 11 million barrels of oil per day from the market, more than the combined impact of the oil crises of the 1970s, he added.

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With prices sharply higher, investors were on edge as markets remained volatile.

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So when Washington signalled a possible de-escalation, many investors rushed to sell and lock in profits, triggering a rapid fall in prices.

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– Fears of $150 per barrel –

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Investors were rattled after Trump warned on Saturday that Iran had 48 hours to reopen the Strait of Hormuz or face the destruction of its energy infrastructure.

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The ultimatum raised fears that oil prices could surge toward $150 per barrel, analysts said.

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Crude reaching those highs “would have catastrophic implications” for the global economy and for US public opinion ahead of the midterm elections, said John Plassard, head of investment strategy at Cite Gestion Private Bank.

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But when Trump said on Monday that the US would halt strikes on power plants for five days, investors took it as a sign the worst-case scenario might be avoided.

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A disruption to shipping could be resolved relatively quickly if the war ends, whereas the damage to energy infrastructure would take years to repair.

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The market can withstand a temporary loss of production, but it “cannot live with 10 percent of global oil production lost for years,” Ole Hvalbye, commodities analyst at SEB bank, told AFP.

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– Nothing guaranteed –

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While Trump welcomed “very good” talks with unidentified Iranian officials, Iran’s foreign ministry denied that any negotiations took place.

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“We need to wait for more clarity,” UBS commodities analyst Giovanni Staunovo told AFP.

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A sustained drop in oil prices will depend on a return to normal shipping through the Strait of Hormuz, not just political statements, said Hvalbye.

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Even if a truce is reached soon, prices are unlikely to fall back immediately to pre-war levels.

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At least 40 energy facilities in nine Middle Eastern countries have been “severely or very severely damaged”, Birol said.

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Importing countries have begun drawing on their strategic reserves to offset supply shortages — these reserves will need to be replenished, keeping demand and prices under pressure.

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AFP

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