Brent Drops Below $100 as US Sends 15-Point Peace Plan to Iran

Wednesday was the biggest turn around in the price of crude oil in weeks. Brent futures fell 5.2% to $99.01 a barrel and WTI fell 4.5% to $88.23. President Trump told reporters from the Oval Office that Washington and Tehran are "in negotiations right now," and Iran said it would let "non-hostile" oil ships pass through the Strait of Hormuz for the first time since the conflict started almost four weeks ago.

Both contracts fell more than 6% to their session lows before partially recovering as traders thought about how long the diplomatic signal would last and whether the U.S. military would continue to be stationed in the area.

The Peace Plan and What's Still Unknown

A report in the New York Times, citing two unnamed officials, that the U.S. had sent Iran a 15-point peace plan through Pakistan as a go-between set off the selloff. From the Oval Office, Trump confirmed the main points and said he had changed his mind about threatening to attack Iran's energy infrastructure "because we're negotiating."

The unknowns are important. It's still not clear how widely the idea has been shared among Iranian leaders, whether Israel would support it (since it has been carrying out its own attacks on Iran), or what kinds of concessions are being talked about. In public, Tehran denied having any direct talks with Washington. This is the same stance it has taken throughout the conflict, even though contact is still going on behind the scenes through regional middle-men.

Iran's top military spokesman made it clear that any relief might only be temporary, saying that oil prices won't return to normal until the Iranian military takes control of the region and makes it stable. This language makes it very unclear how long Wednesday's partial opening of the Hormuz Strait will last.

Goldman's Framework: Trading Risk Premium, Not Fundamentals

According to Daan Struyven, co-head of global commodities research at Goldman Sachs, the current state of the market is very honest: this is the biggest change in the global oil supply in decades, and short-term price changes are not caused by changes in the base case but by changes in how likely people think the worst-case scenarios are to happen.

Goldman said that crude is actually trading a geopolitical risk premium because investors are protecting themselves against a long-term closure of the Hormuz Strait and critically low inventories instead of pricing in a stable supply picture. The bank's base case is that Hormuz flows will return to normal in April after a four-week recovery period. However, it warned that even partial outages after that time would mean that its price predictions would have to be significantly raised.

That framework explains Wednesday's pattern of volatility: a 6% drop on signs of de-escalation, followed by a partial rebound as investors remembered that more U.S. troops are still coming to the area.

The effects of the supply shock are starting to show up around the world. Governments are lowering their targets for energy use and airlines are reducing their flight schedules. This means that people are using energy, which is something that the government has been trying to do with their policies.

When the price of Brent oil goes below $100 it is a deal for peoples minds.. It does not mean that everything is back to normal with the oil supply. It just means that people are not as worried about the things that could happen.

The oil trade is still about what is in the news. This is because we are waiting to see what Irans leaders say about the 15-point proposal. We are also waiting to see if the number of ships going through Hormuz goes back to normal. Until these things happen the price of oil will keep going down based on what is in the news. If the talks between countries do not go well the price of Brent oil will probably go back up to, over $105 quickly.