Crude oil prices slide 19% in May, post worst monthly fall since 2020; Will US-Iran peace deal deepen losses?

Crude oil prices declined on Friday, 29 May, after the US and Iran tentatively agreed to extend the ceasefire by 60 days, raising hopes of smoother oil flows through the Strait of Hormuz. Brent crude slipped towards $92 per barrel and is on track for its biggest monthly decline since 2020, falling nearly 19% in May, while WTI crude hovered around $87.

Reports suggested that shipping through the Strait of Hormuz could remain unrestricted, although US officials indicated that discussions were still ongoing and no final agreement had been reached. Vice President JD Vance said it was too early to determine whether a formal deal with Iran would materialise.

Oil prices continue to face downward pressure amid hopes for a resolution to the Middle East conflict, though earlier positive sentiment over negotiations has since diminished without any agreements. The turmoil around the Strait of Hormuz previously caused a significant global energy crisis, affecting daily oil supply by millions of barrels.

Even with hopes for an extension of the ceasefire, numerous obstacles persist, including clearing mines from shipping lanes, restarting closed oil fields, repairing damaged energy infrastructure, and resuming normal cargo transport.

Brent crude has fallen by 10.5% this week, experiencing its largest weekly drop since April 2020, while WTI crude has decreased by 9.2%, representing its most significant weekly decline since that same month in 2020. On the home front, MCX crude oil prices have decreased in 7 of the last 8 trading sessions, losing nearly 17% over that period.

According to Vandana Bharti, Head of Commodity Research at SMC Global Securities, Brent crude’s nearly 19% decline this month to around $91 per barrel reflects a sharp unwinding of geopolitical risk premiums, though strong market fundamentals continue to support prices. She noted that consecutive multi-million-barrel global inventory drawdowns in March and April, along with a projected second-quarter supply deficit ahead of the peak summer driving season, are likely to limit further downside.

Bharti added that escalating war-risk premiums and rerouted shipping routes have widened the Brent-WTI spread to more than $5 per barrel. She believes that if a formal ceasefire agreement is reached, Brent crude could fall below $85 and eventually find support near $80–82. In the domestic market, MCX crude oil may then slip below the ₹8,200 support level and head towards the major base around ₹7,500. However, if peace talks fail, strong demand and supply deficits could trigger a sharp rebound in Brent prices towards $110–115 per barrel, while MCX crude may move above ₹9,155 and retest the ₹9,400–9,600 zone.

Kaveri More, Commodity Analyst at Choice Broking, said Brent crude has corrected by nearly 18% this month amid concerns over slowing global demand, easing geopolitical tensions, and expectations that Saudi Arabia will lower official selling prices for Asia for the second straight month. She noted that despite ongoing Middle East tensions, weak refining margins and sluggish Asian demand continue to weigh on crude prices.

According to More, the overall outlook for MCX crude oil remains moderately bearish, with prices likely to face selling pressure on rallies unless geopolitical tensions escalate significantly. She sees immediate support near ₹8,100, with a sustained breakdown potentially dragging prices towards ₹7,750. On the upside, resistance is placed in the ₹8,900–9,500 range, where fresh selling interest is expected to emerge.

According to Dhaval Popat, Analyst – Energy at Choice Institutional Equities, Brent crude prices are currently reacting more to geopolitical headlines than underlying fundamentals. He said the recent sharp correction has largely been driven by optimism surrounding a potential US-Iran agreement and expectations that shipping flows through the Strait of Hormuz could gradually normalise. Popat added that any formal announcement or positive progress in negotiations could push Brent crude prices lower in the near term.

However, he noted that the physical oil market remains considerably tighter than current prices indicate. Over the past two months, a global supply deficit of nearly 7–11 million barrels per day has only been partially offset by higher US production and releases from strategic petroleum reserves. Continued inventory drawdowns suggest that underlying demand-supply balances remain tight despite the recent price decline.

Popat believes that while crude oil may remain under pressure if diplomatic efforts progress, the downside is unlikely to be unlimited. Any delay in finalising a deal, slower-than-expected restoration of oil flows, or renewed disruptions in the Strait of Hormuz could quickly revive the geopolitical risk premium. In such a scenario, Brent crude could climb back above $100 per barrel during the peak summer demand season in July.

He expects Brent crude to average around $82 per barrel in FY27 under the base-case scenario. However, if prolonged disruptions persist and flows through Hormuz fail to normalise by the end of June, prices could average closer to $98 per barrel in FY27.

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