WTI Crude Falls Over 13% Below $90. US and Iran to Reach Truce Memorandum but Crude Supply Difficult to Recover in Short Term

TradingKey - Before the market opened on May 5, international crude oil losses widened, WTI crude oil futures plummeted below $90 at one point, hitting a low of $88.71, the first time since April 21, with a decline reaching as much as 13.2%. Brent crude futures once plunged 12%, hitting a low of $96.77.

Meanwhile, precious metals continued to rise, spot gold has now returned to $4,700, rising more than 3% during the day, silver spot prices rose more than 6%.

On the news front, American news website Axios, citing U.S. officials and people familiar with the matter, reported that the United States and Iran are close to reaching a memorandum of understanding on a ceasefire. A spokesperson for the Iranian Foreign Ministry confirmed they are evaluating a 14-point peace proposal submitted by the U.S.

According to parts of the agreement, Iran will commit to suspending uranium enrichment activities, while the U.S. agrees to lift sanctions on Iran and release billions of dollars in frozen Iranian funds; both parties will simultaneously lift restrictions on passage through the Strait of Hormuz.

The memorandum will declare an end to the regional war and initiate a 30-day negotiation period to reach a detailed agreement, with talks likely to take place in Islamabad or Geneva. According to information disclosed by U.S. officials, during these 30 days, restrictions and blockades on shipping in the strait by both countries will be gradually lifted; however, if negotiations fail, the U.S. military will resume the blockade or re-initiate military action.

The report noted that the U.S. expects to receive Iran's response to several key issues within the next 48 hours. Although no agreement has been reached yet, sources said this is the closest the U.S. and Iran have been to a deal since the war began.

Previously, Donald Trump announced on local time May 5 that the "Operation Freedom Plan" to "clear" trapped vessels in the Strait of Hormuz would be suspended. U.S. Secretary of State Marco Rubio also publicly stated that day that "Operation Epic Fury," the military campaign launched by the U.S. against Iran in late February this year, has ended.

However, based on the war's impact on crude oil, Wall Street continues to raise oil price forecasts due to the lag in crude production and a significant decline in oil inventories.

Dilin Wu, a strategist at brokerage Pepperstone Group, stated that there is also an inherent lag in the recovery of crude supply; oil shipments through the strait remain limited, stranded tankers need time to reroute, the insurance market needs time to reassess risks, and production requires time to gradually recover.

Warren Patterson, head of commodities strategy at ING, believes that the lack of progress in U.S.-Iran negotiations and the Middle East situation means the market is tightening daily, necessitating a repricing of oil at higher levels.

Barclays has raised its average oil price forecast for the year this month from $85 to $100 per barrel, stating that while oil prices may pull back even if shipping returns to normal, the likelihood of full relief in the short term remains limited.