Oil prices fell sharply on Thursday after U.S. President Donald Trump reportedly signed an agreement with Iran aimed at ending hostilities in the Middle East, while the International Energy Agency (IEA) warned that a lasting peace could lead to a significant global oil surplus next year.
Brent crude, the international benchmark, dropped nearly 3 percent to US$77.30 per barrel, while U.S. West Texas Intermediate crude fell more than 3 percent to US$74.33 per barrel as traders reacted to expectations of increased oil supplies.
Market sentiment was driven by reports that Trump and Iranian President Masoud Pezeshkian had reached an agreement to halt the conflict that has unsettled global energy markets in recent weeks.
However, uncertainty remained after Trump reportedly warned that military action could resume if Iran failed to comply with the terms of the agreement.
“We’re going to bomb the hell out of them if they violate the agreement,” Trump told reporters, according to media reports, while adding that he hoped Tehran would honour its commitments.
The prospect of a sustained reduction in tensions has raised expectations that Iranian oil exports could increase, adding to global supply at a time when production from other major producers remains strong.
The IEA, in its latest monthly oil market report, said a durable resolution to the conflict could significantly boost supplies and create a substantial surplus in global oil markets next year.
The agency estimates global oil supply will average 102.4 million barrels per day in 2026 before rebounding sharply to 110.3 million barrels per day in 2027.
“Our first look at 2027 balances shows a significant overhang emerging next year,” the IEA said.
A supply overhang occurs when production exceeds demand, often placing downward pressure on prices.
The report suggests that easing geopolitical tensions, combined with rising output from major producers, could leave markets awash with crude unless demand strengthens significantly.
Lower oil prices could offer some relief to consumers and policymakers concerned about inflation, particularly after energy costs surged during the conflict.
However, analysts cautioned that risks remain despite the recent decline in prices.
New York Life Investment Management said lower crude prices do not yet signal the end of inflationary pressures linked to energy markets.
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“Oil remains above pre-conflict levels, shipping normalisation will take time, and inventories and strategic reserves still need to be replenished,” the firm said in a market note.
The Middle East remains a critical region for global energy supplies, and any disruption to production or shipping routes can quickly affect international markets.
Investors are now expected to closely monitor implementation of the U.S.-Iran agreement and any signs that additional Iranian crude could return to global markets in the coming months.
The outlook for oil prices will also depend on global economic growth, energy demand and production decisions by major exporting countries as markets assess the possibility of a supply surplus in 2027.
