Oil prices experienced a sharp decline on Friday, with Brent crude dropping 3.7% to $87.04 per barrel and West Texas Intermediate falling 3.55% to $84.60, as reports of a potential peace agreement between the United States and Iran eroded the war premium that had bolstered crude values in recent weeks. The decline brought both benchmarks to their lowest levels since April 17, driven by growing optimism that a diplomatic resolution could ease tensions in the Middle East.
According to analysts, the market is pricing in a higher probability of a deal, which would remove a key risk factor from oil prices. Phil Flynn, senior analyst at Price Futures Group, noted that traders are reacting to signals of progress in negotiations. The potential agreement could involve a memorandum between the two nations, with Geneva emerging as a likely venue for signing, potentially as early as Sunday, though Iranian media have denied that final terms have been confirmed.
The impact on energy stocks was nuanced. While lower crude prices typically pressure producer earnings, shares of major oil companies rose as investors weighed the decline against still-tight supply conditions. Exxon Mobil (XOM) traded near $148.27, up approximately 1.1%, and Chevron (CVX) rose about 1.2% to $187.96. The Energy Select Sector SPDR Fund (XLE) gained roughly 1.6%, indicating that market participants are not uniformly selling energy holdings despite the drop in oil.
Supply Risks Remain Elevated
The underlying supply picture remains unsettled, particularly concerning the Strait of Hormuz, a critical chokepoint through which roughly a fifth of global oil and natural gas once transited before war-related disruptions. Even with U.S. military support facilitating some Gulf Arab oil exports, flows through the strait remain well below the pre-conflict level of about 15 million barrels per day, as shipping and insurance companies remain hesitant due to ongoing threats.
Market participants are now focused on tangible evidence of a reopening rather than just headline optimism. Tamas Varga, an analyst at PVM Oil Associates, emphasized that headlines are driving the market as confidence grows that an eventual deal will be struck and the strait will reopen. The next major catalyst will be whether a formal agreement is signed and whether oil shipments can safely resume through the waterway.
Bull and Bear Cases for Oil
Despite Friday's decline, crude prices remain historically elevated. The U.S. Energy Information Administration (EIA) projects global oil inventories will fall by 6.3 million barrels per day in the second quarter and 7.6 million barrels per day in the third quarter, with OECD stocks expected to reach their lowest levels since 2003. The EIA also forecasts Brent averaging $105 per barrel in June and July if the Strait of Hormuz remains largely closed to shipping.
On the bearish side, de-escalation could remove additional war premium from crude just as demand shows signs of weakening. Goldman Sachs has lowered its 2027 average Brent forecast to $80 per barrel, citing stronger supply growth from the U.S., Brazil, Guyana, Venezuela, and the UAE, along with persistent demand weakness and China's transition toward electric vehicles. The investment bank still sees Brent averaging $90 in the fourth quarter of 2026 but warns that faster supply normalization and weaker demand could push prices toward $70 in late 2026 and $60 in 2027.
Valuation Risks for Energy Stocks
Current valuations for energy stocks appear stretched. Exxon Mobil trades at a price-to-earnings ratio of approximately 25, while Chevron's P/E is around 33. These multiples can be justified if crude remains elevated and cash flows stay strong, but they become increasingly difficult to support if a peace deal reopens shipping lanes and oil prices continue to slide.
For investors, the key metric to monitor is not just Brent's next move but whether tankers, insurers, and Gulf exporters behave as if the Strait of Hormuz is reopening. If shipments recover and inventories stop declining, oil-linked stocks could lose support even as the broader market benefits from lower inflation risk. Conversely, if talks fail or shipping remains restricted into late July, analysts warn that stronger seasonal demand and low inventories could push prices significantly higher, reviving the earnings case for producers while pressuring fuel-sensitive sectors.
