The oil price went on a wild ride overnight.
While most of us were soundly sleeping, the West Texas Intermediate crude oil price plunged 4.8%.
WTI has since recovered some of those losses. At the current US$70.85 per barrel, that's down about 2.6% since this time yesterday.
At US$75.53 per barrel, Brent crude oil is down 2% over this same period.
Why the big overnight fall in the oil price?
In a handy reminder of why investors should tune out the noise and focus on the longer-term picture, the oil price looks to have tumbled on rumours of a pending deal between the United States and Iran.
Rigid western sanctions remain in place on Iran over the nation's uranium enrichment facilities, which could lead to the development of nuclear weapons.
Speculations of an agreement were fuelled by media outlets across the Middle East, including Israeli-based Haaretz.
The paper reported:
Israel expects an agreement to be reached within a few weeks, with the understandings expected to include an Iranian agreement to stop uranium enrichment at high levels in return for easing sanctions
Traders quickly sent the oil price lower in anticipation that Iranian crude could soon flow freely again.
But that appears to be premature, with the US State Department denying the two nations are close to reaching a deal. "Any reports of an interim deal are false," spokesman Vedant Patel said.
Rebecca Babin, a senior energy trader at CIBC Private Wealth, labelled the sell-down in the oil price a "knee-jerk move lower" (quoted by Bloomberg).
"However, the price action demonstrates just how quickly crude can turn lower while it struggles to move higher even when there are positive developments," Babin said.
Indeed, if a deal is in the cards, it could see a lot more crude hitting global markets, pressuring the oil price.
Bloomberg noted analyst forecasts that Iran could add 1 million barrels per day to global markets within months if sanctions are lifted. Analysts expect it would take Iran a year to return to full production of some 3.7 million barrels per day.
How are ASX 200 energy shares reacting?
While the oil price has recovered some of the losses from the overexuberant overnight selling action, the 2% decline in Brent crude is taking its toll on S&P/ASX 200 Index (ASX: XJO) energy shares.
In morning trade, the S&P/ASX 200 Energy Index (ASX: XEJ) is down 0.4%. That compares to a 0.3% gain posted by the ASX 200.
As for the big oil and gas stocks, the Santos Ltd (ASX: STO) share price is down 0.7% and the Woodside Energy Group Ltd (ASX: WDS) share price has dropped 0.5%.
If the latest US Energy Information Administration (EIA) forecast for the oil price proves out, there could be some major upside ahead for the big ASX energy stocks.
The EIA expects the Brent crude oil price to average US$84 per barrel in 2024.
