A sharp decline in oil prices and a surge in global financial markets occurred on Wednesday following reports that the United States and Iran are close to reaching a memorandum of understanding to end the ongoing conflict and reopen the Strait of Hormuz. Axios reported that Washington and Tehran are negotiating a one-page memorandum to end the war and set a framework for further nuclear talks, with both sides expected to respond to key points within 48 hours according to U.S. and Pakistani sources involved in the diplomatic efforts [1][3]. The discussions reportedly include a gradual lifting of restrictions around the Strait of Hormuz, an Iranian moratorium on nuclear enrichment, an easing of U.S. sanctions, and the release of billions of dollars in frozen Iranian funds [1][3].
The market reaction was immediate and dramatic. The price of West Texas Intermediate (WTI) crude oil fell sharply, posting an 8.91% daily decline to around $91.00 per barrel according to FXStreet, while NBC News reported a 12% plunge to below $90 per barrel. International Brent crude oil dropped 11% to below $100 per barrel. Wholesale gasoline prices fell 7% and heating oil, a proxy for jet fuel, declined 8% [1][3]. Stock futures surged, with S&P 500 futures up 1%, Nasdaq 100 futures up 1.6%, Russell 2000 futures up 2%, and Dow futures jumping more than 560 points. European markets also rallied, with the Stoxx 600 index soaring over 2.2% [3]. Bond yields dropped sharply, with the 10-year and 30-year U.S. government bond yields hitting their lowest levels in about a week, potentially signaling relief for consumer borrowing costs [3].
The developments led to a strong risk-on move across financial markets as investors unwound the geopolitical risk premium associated with potential supply disruptions in the Strait of Hormuz, a strategic chokepoint for about one-fifth of global oil flows [1]. The bearish move in oil accelerated after President Donald Trump announced a temporary pause of "Project Freedom," the U.S. operation to restore commercial shipping through the Strait, citing "great progress" in peace talks. U.S. Defense Secretary Pete Hegseth confirmed that the U.S.-Iran ceasefire "certainly holds for now" and emphasized that Washington was not seeking renewed escalation [1][3].
Despite the sharp decline in oil prices, physical market fundamentals remain tight. The American Petroleum Institute reported an 8.1 million barrel draw in U.S. crude inventories last week, far exceeding the expected 2.8 million-barrel draw, and Goldman Sachs warned that global oil inventories are near their lowest levels in eight years [1]. However, markets are currently focused on the improving geopolitical outlook and the potential normalization of energy flows in the region [1].
In related commodities, copper prices edged higher, with LME copper trading above $13,000 per ton, supported by improved risk sentiment but capped by elevated exchange inventories, now near their highest since 2013. ING analysts noted that copper remains headline-driven, with a prolonged closure of the Strait of Hormuz posing risks of higher energy costs and weaker manufacturing demand. Sustained gains in copper would require stronger physical demand or inventory drawdowns [2].
CONCLUSION
Markets responded positively to reports of progress toward a U.S.-Iran agreement, with oil prices plunging and equities rallying as geopolitical risks eased. While physical oil market fundamentals remain tight, the focus has shifted to the potential for normalized energy flows and reduced supply disruptions. The situation remains fluid, with further market moves likely as negotiations continue.