Oil plunges, Dow sees its best day in a year after US-Iran ceasefire, but ‘hurdles remain’

(CNN) — Oil prices plummeted and stocks surged Wednesday after a fragile ceasefire between the United States and Iran took effect, spurring hopes that oil tankers would be allowed to pass through the Strait of Hormuz.

WTI, the US crude benchmark, tumbled 16.41% to settle at $94.41 per barrel. Still, crude is well above the $67 per barrel level it settled at on February 27, before the war began.

Brent crude, the global benchmark, dropped 13.29% to settle at $94.75 per barrel, its lowest settle price since March 11 — but also still well above the $73 per barrel level it settled at on February 27.

US stocks closed sharply higher: The Dow soared 1,325 points, or 2.85%, and had its best day in a year. The S&P 500 gained 2.51%, and the tech-heavy Nasdaq Composite surged 2.8%.

Both WTI and Brent posted their biggest single-day declines since April 2020. Despite the sharp moves, there is uncertainty about the state of the ceasefire and whether more oil tankers will actually be able to resume transit through the critical strait, through which about 20% of the world’s oil supply normally passes.

White House press secretary Karoline Leavitt said Wednesday that Iran has assured the White House that it is allowing traffic through the Strait of Hormuz, despite reports of Tehran once again closing the waterway after Israel attacked Lebanon.

The war in the Middle East — and the effective closure of the crucial Strait of Hormuz — has caused the biggest oil supply shock on record, choking off roughly 12 million to 15 million barrels of crude oil a day.

“The market has been eager to get good news but it remains to be seen if the Strait of Hormuz opens fully,” Bob McNally, founder and president of Rapidan Energy Group, told CNN. “That’s the whole ball of wax and so far Washington and Tehran seem to be talking past each other on that.”

American drivers have seen the average price of a gallon of regular gas soar $1.18, or 40%, to $4.16 since the start of the war, according to AAA. They could get some modest relief soon, with retail prices expected to start to edge down in the coming days.

But price-tracking service GasBuddy estimates it’ll still take one to two weeks for the average price nationally to get back below $4. And it is likely to be months before the average price is back to the pre-war level of less than $3 a gallon, said oil analyst Andy Lipow, president of Lipow Oil Associates.

“Crude oil is still $30 per barrel higher than it was on February 27, before the conflict began,” Lipow said in an email to CNN Wednesday. “Gasoline futures are still about 70 cents higher than when the war started. It will take weeks if not months to restart crude oil production (in the Persian Gulf) and get it exported.”

The terms under which tankers will be allowed to pass through the strait remain unclear, with Iran’s semi-official Tasnim news agency reporting that Iran and Oman plan to charge transit fees — a situation unlikely to be acceptable to the United States and its allies, particularly if any of that revenue flows to Iran’s Islamic Revolutionary Guard Corps (IRGC), designated a terrorist organization by many Western countries.

Iran also emphasized that the ceasefire was only temporary. “This is not the end of the war but all military branches should follow the Supreme Leader order and cease their fire,” according to a statement read out on state-run news channel IRIB.

Iran said its military would regulate passage through the Strait of Hormuz, granting the country “unique economic and geopolitical standing,” according to a statement from Iran’s Secretariat of the Supreme National Security Council.

Tehran has in recent weeks charged some shipping companies a reported $2 million fee to guarantee safe passage through the strait.

Transit fees of $1-2 million per tanker would add roughly $1 per barrel to the cost of oil transported through the Strait, according to Neil Shearing, group chief economist at Capital Economics. That amounted to a “modest impact on global energy prices,” though in practice could mean a “de facto partial nationalisation of the shipping route,” he added.

“There are significant hurdles to overcome before the ceasefire agreement between the US, Israel and Iran can translate into a lasting end to the war.”

Traders will now look for evidence that the large volume of oil and natural gas stranded in the Gulf region is beginning to move through the strait.

There are “early signs” of this happening, MarineTraffic, a ship-tracking platform, said on X. It said that a Greek-owned bulk carrier and a Liberia-flagged vessel had transited the strait early Wednesday.

As of Tuesday, 187 tankers laden with 172 million barrels of seaborne crude and refined oil products remained inside the Gulf, according to Kpler, a global trade intelligence firm.

That backlog won’t clear overnight, with potential lasting consequences for energy markets.

“Beyond the near term, Iran’s ruling regime has (arguably) solidified its political control, and has demonstrated its capacity for bringing global oil and gas markets to their knees,” Karl Schamotta, of Corpay Currency Research, wrote in a note Tuesday evening.

Global stock markets surge

Beyond oil, news of the ceasefire has sparked a relief rally in stock markets around the world. Countries in Asia and Europe are sensitive to the volatility in energy prices because they are more reliant on the Middle East for oil and liquified natural gas.

South Korea’s Kospi led gains in Asia to close 6.87% higher. Japan’s Nikkei gained 5.39%, its best day since last April. Hong Kong’s Hang Seng gained 3.09%.

In Europe, Germany’s Dax soared 5.06% and France’s CAC 40 index jumped 4.49%, each posting their best day since March 2022.

Wall Street’s fear gauge, the VIX, dropped 22% to just above its pre-war level. With its surge Tuesday, the tech-heavy Nasdaq is down just 0.15% since the war began, although it is still down 5.5% from its record high in October.

Trump agreed to the ceasefire less than two hours before his 8 p.m. ET deadline to destroy a “whole civilization.” He said the agreement hinged on the reopening of the Strait of Hormuz.

“We received a 10 point proposal from Iran, and believe it is a workable basis on which to negotiate,” Trump posted on Truth Social on Tuesday night.

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CNN’s Chris Isidore contributed reporting.