Oil prices slump on Iran-Israel ceasefire optimism; Powell set to speak

Investing.com-- Oil prices fell sharply Tuesday, extending recent losses after U.S. President Donald Trump announced that a ceasefire had been brokered between Iran and Israel, potentially ending their bitter conflict.

At 08:00 ET (12:00 GMT), Brent oil futures for August fell 3.7% to $67.91 a barrel and West Texas Intermediate crude futures fell 3.7% to $66.01 a barrel. 

Both oil contracts settled more than 7% down in the previous session, dropping to a two-week low having rallied to five-month highs after the U.S. attacked Iran’s nuclear facilities over the weekend.

Trump announces Iran-Israel ceasefire

Trump said that Israel and Iran agreed to a "complete and total" ceasefire, and that Iran will begin the ceasefire almost immediately, followed by Israel in 12 hours. adding that the Israel-Iran war will end after 24 hours of the ceasefire remaining in place.

Trump’s announcement was preceded by what was seen as a restrained strike by Iran on a U.S. military base in Qatar. Trump had called the move a “very weak response” to the U.S. attacks on Iran’s nuclear facilities over the weekend. 

Oil prices had fallen sharply after the attack, given that there were no reported casualties. Markets were also relieved by Iran choosing to attack the base instead of oil tankers in the Strait of Hormuz. 

However, doubts remain over whether the ceasefire will hold after Israel said it had ordered its military to strike Tehran in response to what it said were missiles fired by Iran.

Iran denied that it had violated the ceasefire.

The direct U.S. involvement in the war also focused investors on the Strait of Hormuz, a narrow and vital waterway between Iran and Oman, through which between 18 and 19 million barrels per day of crude oil and fuels flow, accounting for nearly a fifth of the world’s consumption.

"An effective blocking of the Hormuz would lead to a dramatic shift in the outlook for oil, pushing the market into deep deficit. Spare OPEC production capacity wouldn’t help in this situation. The bulk of it sits in the Persian Gulf. So, these flows would also have to go through the Strait of Hormuz," said analysts at ING, in a note.

"Under a successful blockade, we would expect to see Brent trade up to $120/bbl in the short term. A prolonged outage (until the end of 2025) would likely see prices trading above $150/bbl to new record highs."

Tuesday’s losses in oil were an extension of a sharp decline seen on Monday, amid growing hopes that the Israel-Iran conflict will simmer down.

Oil’s losses were triggered by a seemingly muted response from Tehran to U.S. attacks on its nuclear infrastructure. Tehran attacked a U.S. military base in Qatar, although no casualties were reported.

Powell to testify before Congress

Away from the Middle East, traders will focus on the start of Federal Reserve Chair Jerome Powell’s two days of testimony before Congress on Tuesday.

Powell will likely be grilled on the Fed’s decision to keep rates unchanged at its latest meeting and adopt a wait-and-see attitude to future borrowing cost changes. Policymakers, including Powell, have been especially wary of the uncertainty surrounding the impact of Trump’s aggressive tariff agenda.

However, the Fed chair is coming under pressure from Trump to cut interest rates, with the president calling for rates to be brought down by at least "two to three points," arguing that the U.S. will pay for Powell’s "incompetence."

Lower interest rates would likely stimulate economic growth in the world’s largest economy, and biggest energy consumer. 

Ambar Warrick contributed to this article