US energy shares slump as Iran deal lowers Hormuz supply disruption risk

By Arunima Kumar and Pooja Menon

June 15 (Reuters) - U.S. energy shares fell on Monday as crude prices dropped after Washington and Tehran agreed terms to end ​their months-long conflict and reopen the Strait of Hormuz, a vital oil transit chokepoint.

The U.S. and Iran will sign a memorandum of understanding in Switzerland on Friday, said the prime minister of Pakistan, which helped mediate talks between the two sides.

U.S. President Donald Trump said on Sunday the Strait of Hormuz, which carries roughly a fifth of global oil consumption, would be open "toll free" and that a U.S. naval blockade of Iranian ports would end.

Brent crude futures fell 5.5% to $82.55 per barrel by 1420 GMT, while the U.S. West Texas Intermediate crude was down 5.8% at $79.96 per barrel. [O/R]

Energy stocks had surged after the conflict broke, driven by escalating fears of supply disruption through the Strait. The S&P 500 Energy index has gained 23.4% so far this year.

"Markets will price in a large optimism discount that 'normality' is returning, although we would caution that flows are not likely to resume to anywhere near pre-war levels for months, and investors should follow how quickly Gulf producers are able to resume oil production and exports following damage from the war and whether more ships will enter the region," said Ashley Kelty, analyst Panmure Liberum.

Shares of Exxon Mobil and Chevron fell 6.2% and 4.6%, respectively. Diamondback Energy, Devon Energy, ConocoPhillips and Occidental Petroleum were down between 3.6% and 4.9%.

Refiners Valero Energy, Marathon Petroleum and Phillips 66 also declined between 4.3% and 5.8%.

Refining stocks had rallied during the conflict as disruptions to Middle Eastern oil flows boosted fuel margins and drove stronger demand for U.S. fuel exports.

In Europe, shares of BP fell 4.5%, while Shell dropped 5.2%.

Some analysts, however, warned that oil markets may be moving ahead of reality.

The market remains much more responsive to optimistic Trump comments rather than global oil balances that could continue to tighten through the rest of the summer, Ritterbusch & Associates said in a note.

"Emotion and sentiment appear to be overruling fundamentals as hopes for an end to the war are being prioritized over the current low level of global stock cover that is approaching critical levels."

(Reporting by Arunima Kumar and Pooja Menon in Bengaluru; Editing by Shilpi Majumdar)