Oil drops over 5% after US-Iran deal, but analysts warn energy shock 'is not over' and recovery will take months

The deal

President Donald Trump announced Sunday on Truth Social that the United States had reached an agreement with Iran to end the war and reopen the Strait of Hormuz, without tolls, along with an immediate lifting of the US naval blockade of Iranian ports. A memorandum of understanding was signed by Trump, Vice President JD Vance, and Iranian Parliament Speaker Mohammad Bagher Ghalibaf, a senior US official confirmed Monday. The official signing ceremony is scheduled for Friday in Switzerland.

Trump urged global shipping to resume. "Ships of the world, start your engines. Let the oil flow!" he wrote. In a follow-up post, he said the Strait would open after the signing on Friday, with mines being removed. Iran's Deputy Foreign Minister Kazem Gharibabadi confirmed the deal but said the full text would be released only after the ceremony.

Oil market reaction

Brent crude for August delivery fell 5.14% to $82.83 a barrel, while West Texas Intermediate for July dropped 5.58% to $80.14 a barrel, one of the sharpest one-day declines since the war began in late February. Prices had touched $97 a barrel in early June before the agreement was signalled. About 20% of the world's oil flows passed through the Strait before Iran effectively closed the waterway on 28 February, forcing the largest supply disruption in history.

Why recovery will be slow

Analysts cautioned that the deal does not mean an instant return to normal. Daniel Hines, senior commodity strategist at ANZ, said the energy shock "is not over" and that he does not foresee shipping traffic returning to pre-conflict levels soon. "The tough phase is ahead of us. It will be a very, very demanding recovery process," he told CNBC. He cited mine-clearing risks, maintenance of around 200 vessels trapped in the Persian Gulf, and depleted global reserves as obstacles that could take weeks or even one to two months to resolve.

Bart Melek, global head of commodity strategy at TD Securities, estimated that even if flows normalise immediately, 800 million barrels of inventory will be lost by November. Hines added that a Brent price around $80 would not balance the market over the next three to six months, forecasting a range in the low $90s for the third quarter.

Uneven restart across producers

The pace of recovery will differ sharply among Gulf producers. Saudi Arabia and the United Arab Emirates, with their resilient infrastructure, are expected to restart production and export terminals relatively quickly. Iraq faces the most difficult path: its southern fields, entirely dependent on seaborne exports via the Basra hub, have been largely shut in. Alan Gelder, senior vice-president at Wood Mackenzie, said Iraq "could find themselves in a much tougher situation because they are under much greater blockade and their fields are more complex." Wood Mackenzie models estimate it could take about a year for Iraqi flows to return to full capacity.

We don't know what 'open' means for the Strait of Hormuz.

This technical scepticism means the release of stored cargoes and the start of new shipments will not instantly follow the signing.

Markets rally on relief

Equity markets across Asia surged. Japan's Nikkei 225 jumped 5.5%, South Korea's Kospi gained up to 5.7%, and the Philippines benchmark rose over 6%, its largest advance in six years. US futures pointed higher, with S&P 500 contracts up about 1% and Nasdaq futures rising 1.8%. The MSCI Asia index gained roughly 3%.

Josh Gilbert, analyst at eToro, told Bloomberg: "Markets have been waiting for this news for months and the relief is already evident. However, this is still a move of optimism, not certainty. The world will not fully calm until the deal is signed, meaning investors need to be cautious." Khoon Goh, head of Asia research at ANZ, noted that the oil drop would give central banks some relief on inflation, with the Federal Reserve's rate decision due this week.

Disputed terms and next steps

Iranian state media reported that the Strait would be toll-free for only 60 days, after which it would be placed under joint management by Iran and Oman. Vice President Vance told CNBC that the US expects it to remain toll-free long-term. Pakistan's Prime Minister Shehbaz Sharif announced that Washington and Tehran had agreed to an immediate and permanent cessation of military operations on all fronts, including Lebanon. Pakistan and Qatar acted as mediators in the talks.

Frontline CEO Lars Barstad expressed optimism that if the deal proves credible, tanker transits will resume "fairly quickly." However, many traders and analysts remain cautious pending the final text.