Tankers along the Strait of Hormuz, where one-fifth of global oil output passes.GIUSEPPE CACACE/AFP/Getty Images
Oil fell and stock markets rose on Tuesday after Iran and Israel appeared to honour a ceasefire agreement that had been negotiated by U.S. President Donald Trump.
But the ceasefire almost collapsed early that day, when both sides accused the other of using missile attacks to breach the deal, triggering a bout of volatile market trading. At one point on Tuesday morning, Mr. Trump lashed out at Israel on his Truth Social platform. “DO NOT DROP THOSE BOMBS,” he said. “IF YOU DO IT IS A MAJOR VIOLATION.”
The office of Israeli Prime Minister Benjamin Netanyahu later admitted that Israel had destroyed a radar station near Tehran after the truce came into effect as of 7 a.m. local time, in response to three missiles that Israel said were fired from Iran, also after the ceasefire. No casualties were reported from the Iranian missile salvo.
On Monday, Mr. Trump declared that the two countries had agreed to a ceasefire. Israel did not confirm that it had done so until Tuesday morning, when Mr. Netanyahu’s office said that “all of the military objectives” of the country’s offensive against Iran had been achieved.
Iran's top security body must make the final decision on whether to close the Strait of Hormuz, Iranian TV said on Sunday, after parliament reportedly backed the measure in response to U.S. strikes on several of Tehran's nuclear sites. But what is the strait and why is it so important for oil?
Reuters
Mr. Trump’s Monday message triggered a 7.2-per-cent drop that day in Brent crude, the international benchmark, the biggest fall since August 2022, taking the price to US$71.50 a barrel. The plunge marked a turnaround from the opening price on Monday, when Brent climbed above US$80 as energy traders feared the U.S. bunker-buster bomb attacks on Iran’s uranium-enrichment sites, plus continued Israeli raids, would trigger a wider Middle East war.
Oil trimmed its losses later on Tuesday, after traders took the view that Mr. Trump’s warnings would help ensure the ceasefire would hold.
By early afternoon, European time, Brent crude was down 3.5 per cent from Monday’s close and was trading at just short of US$69. Brent finished the day down 5.75 per cent as the ceasefire held. London’s FTSE 100 Index closed up marginally. Germany’s DAX index performed better, finishing up 1.8 per cent. The euro was up slightly against the U.S. dollar.
The glut of oil on the world markets helped to push down the price. OPEC, the oil cartel dominated by Saudi Arabia, has been hiking production quotas in an apparent bid to boost its market share. The Persian Gulf states, including Iran, have been producing more oil than they were a month ago, according to Bloomberg, putting downward pressure on prices.
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The ceasefire also delivered assurances to energy traders and investors that Iran would keep the Strait of Hormuz, through which about 20 per cent of the world’s seaborne oil passes, open to tanker shipping. Were it to close, oil prices would soar.
Analysts were generally bullish on the market prospects in spite of the apparent violation of the ceasefire early on Tuesday. All the more so since Iran’s Monday missile attack on Qatar, home of a large U.S. military base, was fairly small and resulted in no injuries or fatalities.
“The market is now clearly pricing in major de-escalation between the U.S. and Iran,” Helima Croft, a former CIA analyst now at RBC Capital Markets, said on Tuesday.
In a note published Tuesday morning, just before Israel accused Iran of violating the ceasefire, ING Economics said that, “Markets are materially scaling back geopolitical risk as President Trump declared a ceasefire between Iran and Israel is in place following measured retaliatory strikes on U.S. positions in Qatar yesterday.”
Later, Tony Sycamore, a market analyst at IG Australia, said in a note that, “We expect the market, which has a notoriously short attention span, to shift its focus back to tariffs and the Fed.”
In Congressional testimony on the same day, U.S. Federal Reserve chair Jay Powell appeared to keep his independence intact in spite of pressure from Mr. Trump to bring down rates. Mr. Powell signalled that rate cuts would not happen until at least September.
As the shaky ceasefire came into effect, Germany posted some good economic news. The German economy’s most important leading indicator, the IFO index, which measures business optimism, or lack thereof, rose for the sixth consecutive month. It reached 88.4 in June, the highest level since last summer.