Oil Prices Tumbled Nearly 20% in May (The Biggest Drop Since 2020). Is it Time to Sell Your Oil Stocks?

Oil prices cooled off considerably in May. Brent oil, the global benchmark price, slumped nearly 20%, its biggest monthly decline since 2020. Crude prices fell amid optimism that the U.S. and Iran were closing in on a peace deal that would include a full reopening of the Strait of Hormuz.

Here's a look at whether last month's slump in crude prices is a signal to sell your oil stocks .

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Oil prices ended last month down around $90 a barrel. Brent closed at $92.05 a barrel while WTI, the primary U.S. oil price benchmark, closed down 17% at $87.36 a barrel. That snapped a four-month surge in crude prices that peaked near $120 a barrel at one point early in the war.

The sell-off in crude prices accelerated in the last week of May on growing optimism that the U.S. and Iran were close to reaching an agreement to end the war. The proposed terms included a stipulation that Iran would fully reopen the Strait of Hormuz within 30 days, allowing the free flow of oil and liquefied natural gas out of the Persian Gulf.

However, the optimism-driven decline in oil prices last month doesn't reflect the reality on the ground. The global economy has been burning through its oil stockpiles to bridge the supply demand gap. Global oil consumption is nearly 9 million barrels per day above current supply levels, causing inventories to fall about 2% below their five-year average at this time of year. As a result, inventory levels are approaching critical levels, prompting executives at ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) to warn that oil prices could skyrocket in the coming weeks .

While optimism grew last month, pessimism has returned in early June. According to a Wall Street Journal report on June 1, Iran has halted peace talks with the U.S. due to Israel's continued strikes in Lebanon. That caused crude prices to spike.

Oil could continue rising if the sides don't reach a peace deal soon or the U.S. doesn't reopen the Strait by force. Military action isn't without risk. It increases the likelihood of Iran retaliating with additional attacks against energy infrastructure in the Persian Gulf that could cause damage requiring lengthy repairs.