Crude oil futures experienced a sharp decline on Friday, settling at their lowest levels since early March. Brent crude finished at $87.33 per barrel, down 3.37%, while West Texas Intermediate (WTI) closed at $84.88, a 3.23% drop that marked its weakest settlement since April 17. The sell-off was driven by growing optimism that a peace deal between the United States and Iran could soon be reached, potentially reopening the strategically vital Strait of Hormuz.
Pakistani Prime Minister Shehbaz Sharif announced on Saturday that the two nations have reached a framework agreement after more than three months of conflict. "We are closer to a peace deal than ever before," Sharif stated on X, adding that Pakistan is prepared for an electronic signing, with technical-level discussions scheduled for next week. According to a Reuters report, the draft memorandum of understanding would reopen the strait and lift the U.S. Navy blockade on Iranian ports, with nuclear talks to follow. However, Iranian Foreign Minister Abbas Araqchi cautioned that the memorandum remains unsigned and could still change, noting that final discussions should center on nuclear and economic topics.
The market's reaction underscores the extreme sensitivity to geopolitical headlines. "What's got the market going down is the Iranians saying there is a memorandum of understanding," said John Kilduff, partner at Again Capital. Yet, the drop in prices appears counterintuitive given that the Strait of Hormuz—through which approximately one-fifth of global oil and liquefied natural gas flows—has been effectively closed for weeks. Despite this, prices have remained below the $100 mark, a phenomenon that analysts attribute largely to a sharp slump in Chinese demand.
Bloomberg Opinion columnist Javier Blas, writing for Moneycontrol, pointed to China's import data as the primary factor. Vortexa data showed Chinese crude tanker imports averaged just 6.7 million barrels per day last month, nearly 40% below the country's 2025 average. Separate customs data cited by Moneycontrol revealed that China's crude imports in May hit approximately 7.8 million barrels per day, a level not seen in nearly a decade. This dramatic drop in demand from the world's largest crude importer has helped offset supply disruptions.
On the supply side, U.S. Energy Secretary Chris Wright revealed on Friday that around 7 million barrels of oil per day are still being shipped out of the Persian Gulf with U.S. military assistance—about half the volume that has been stuck in the Strait of Hormuz since the conflict began. "We have a military effort that we've not talked a lot about, which started more recently to get cargoes out," Wright said at a Bloomberg Energy event in Houston.
Despite these efforts, the buffer of available crude is rapidly shrinking. U.S. crude inventories, including the Strategic Petroleum Reserve (SPR), fell to 791 million barrels for the week ending May 29, the lowest level since February 2024 and a decline of nearly 64 million barrels since the war started. The United States is drawing down 172 million barrels from the SPR as part of a broader, IEA-coordinated emergency release of 400 million barrels. "We're approaching unheard of inventory levels," warned Neil Chapman, senior vice president at Exxon Mobil, cautioning that prices could spike sharply if stocks continue to fall.
Consumer prices are already showing signs of pressure. U.S. gasoline prices have eased from $4.56 per gallon on May 21 to $4.11 this week, providing some relief and boosting consumer sentiment in early June. However, inflation worries remain elevated. The next critical test for the oil market will be whether a deal can actually get tankers moving through the Strait of Hormuz. ING analysts have warned that if shipping has not restarted before late July, falling inventories combined with rising seasonal demand could push oil prices to between $120 and $130 per barrel.
