Analysts warn the Strait of Hormuz could stay shut for months even if a deal is reached
Market optimism and geopolitical reality are moving at different speeds: oil prices posted their steepest single-day drop in months Monday even as the Strait of Hormuz stayed closed and both Washington and Tehran played down any breakthrough.
Brent crude fell US$7.24, or nearly 7 percent, to US$96.30 a barrel by 2:29 pm ET, while US West Texas Intermediate dropped US$6.30, or 6.5 percent, to US$90.88, according to BNN Bloomberg.
By Tuesday, Brent had partially recovered, gaining 1.6 percent to US$97.72 in Asian trade, CNBC reported, though WTI remained 5.4 percent below Friday's close after no settlement was recorded Monday due to the US Memorial Day holiday.
The moves were driven by reports that Iran's top negotiator and its foreign minister were in Doha for talks with Qatar's prime minister on a potential agreement to end the three-month-old war, an official briefed on the visit told BNN Bloomberg.
Both sides said they had made progress on a memorandum of understanding that would halt the war and give negotiators 60 days to reach a final deal.
The Nikkei separately reported, as cited by Reuters, that both parties were also discussing opening the strait roughly 30 days after reaching a deal.
US president Donald Trump said in a Truth Social post Monday that negotiations were going "nicely," but warned of resumed strikes if they failed and urged more Arab and Muslim states to sign the Abraham Accords, BNN Bloomberg reported.
US forces conducted strikes in southern Iran the same day talks proceeded, targeting vessels allegedly attempting to lay mines and missile launch sites, CNBC reported.
US Central Command described the actions as self-defence.
Analysts cautioned that a peace agreement would not quickly resolve the underlying supply crunch.
Sparta Commodities analyst June Goh told BNN Bloomberg the underlying supply shortfall of 10 to 11m barrels per day "does not go away immediately," with markets continuing to draw inventories until Middle Eastern crude production comes back online, which is months away.
UBS reported Friday that observed global oil inventories dropped a combined 246m barrels in March and April, and that cumulative production losses could exceed 1 bn barrels by end of May, CNBC reported.
The drawdowns signal that the market remains "strongly undersupplied," UBS said, as cited by the same article.
UBS analyst Giovanni Staunovo added that "the key factors for the oil market to watch should be the physical oil flows; and so far, flows through the strait remain restricted," BNN Bloomberg reported.
Ship-tracking data showed only three LNG tankers and one supertanker with Iraqi crude for China, stranded for nearly three months, had passed through the strait in recent days.
Rory Johnston, founder of the Commodity Context newsletter, urged caution on peace talk optimism, telling the same outlet that talks have "routinely gotten close and then collapsed on the details multiple times" while the Strait of Hormuz remains closed.
Commonwealth Bank of Australia strategist Joseph Capurso told Reuters he remained sceptical, saying repeated assurances of a near deal left too many unanswered questions.
Canada's S&P/TSX composite index closed up 359.53 points at 34,830.89 Monday, led by basic materials, even as the energy sector lagged on falling oil prices, BNN Bloomberg reported.
Brianne Gardner, senior wealth manager of Velocity Investment Partners at Raymond James, told the outlet that investors rotated into materials, technology, and industrial sectors across the board.
Gardner told the outlet she estimated oil prices could settle around US$90.85 a barrel by year-end if a deal is reached, noting that a pullback in crude signalled markets were becoming less worried about an immediate energy shock and more focused on risk sentiment.
"Attention is now going to be turned heavily toward the economic data and how this war has impacted the data in the short-term," she said, according to BNN Bloomberg.
All of Canada's Big Six banks are set to report second-quarter earnings this week, expected to deliver year-over-year gains despite slowing loan growth.
Gardner said investors would be watching closely how the banks "weathered the storm" as delinquencies rise and mortgage renewals pressure household budgets.
Statistics Canada's first-quarter GDP report is also due, which Gardner said would shape rate and growth decisions.
RBC senior economist Claire Fan estimated in a note that GDP grew an annualised 1.7 percent in the first quarter, above the economists' average estimate of 1.5 percent per LSEG Data & Analytics, as cited by the same outlet.
If the first-quarter figure also turns negative, Gardner said, "that will confirm we're in a technical recession."
The Canadian dollar traded at 72.44 cents US on Monday, up marginally from 72.42 cents Friday.
In fixed income, yields were broadly steady Tuesday after a rout the prior week fuelled by fears that sustained high energy prices would reignite inflation and prompt rate hikes, Reuters reported.
The two-year US Treasury yield held at 4.0612 percent and the 10-year fell to 4.5024 percent.
Standard Chartered's head of global research Eric Robertsen told Reuters that "commodity supply dislocations will take months to resolve," and that fiscal support measures would likely drive "a sustained deterioration in sovereign balance sheets."
