News that the US and Iran had agreed an MoU to end hostilities and reopen the Strait of Hormuz produced exactly the market reaction President Donald Trump would have wished for – crude prices down, equity markets up.
From an Arabian Gulf perspective, there is nothing wrong with that. Anything that de-escalates is better than the alternative and we all want to get back to business as soon as possible.
Brent crude fell more than 4 percent to about $83 per barrel on the Hormuz reopening signal, with traders anticipating a tsunami of crude heading for the exit through the strait.
Equity markets moved in the opposite direction. Asian markets gained in early trading on the calculation that a Gulf ceasefire heads off a global recession that has been building since March.
Both moves make a kind of sense, but neither, on reflection, makes complete sense.
While a pause is welcome, this is not peace. It is not even, strictly speaking, a deal. An MoU tells you what people agree on, not what they disagree on – and what they disagree on is still formidable.
Start with the most immediate problem: the logistics of moving oil. The strait has been running at roughly 2 percent of its pre-war throughput.
An unknown volume of crude – industry estimates put it in the hundreds of millions of barrels – has been stored, shut in or put into floating storage since February. The MoU envisages pre-war shipping volumes being restored within 30 days but that is an ambitious timeline. The physical infrastructure of the global energy market does not flick on and off like a light switch.
Nor do we have any definite information on a possible Iranian toll on Hormuz shipping, which the US and the Gulf countries regard as a deal-breaker. There is an awful lot of devil in that detail.
Then there is insurance. The big global marine underwriters effectively withdrew cover from Hormuz transit months ago, when war-risk premiums reached prohibitive levels.
For oil to flow freely, insurers need to be convinced that this ceasefire represents a return to genuine peacetime conditions – and insurers, unlike politicians, do not factor in optimism when they make their calculations. Instead, they deal in risk.
Until the major protection and indemnity clubs formally restore standard cover, the commercial incentive to transit remains severely constrained regardless of what any MoU says.
Then there is Israel.
In the single most important public reaction to the MoU, prime minister Benjamin Netanyahu told Trump directly that Israel “does not consider itself committed to the Lebanese clause in the US-Iran agreement”.
Have markets priced in Israel’s capacity to destroy a deal its government hates? Israel’s ground invasion of Lebanon certainly shows little sign of retreat.
Israel fears that the US-Iran agreement could sharply restrict military freedom of action in Lebanon – which is precisely why it has no intention of honouring that clause.
Iran’s reaction to further Israeli action in Lebanon is the critical variable. Tehran has agreed to this MoU because it needs to – the economic damage of the US-Israeli assault has been severe and Iran needs to replenish both its treasury and its arsenal.
But Tehran has no faith in American or Israeli commitments after two violent assaults in a year. A single significant Israeli strike on Lebanese territory could hand hardliners in Tehran exactly the pretext they need to walk away, and the 60-day window for nuclear talks that the MoU envisages may collapse before it begins.
Genuine grounds for optimism deserve acknowledgment. Quiet diplomatic conversations between GCC officials and their Iranian counterparts in recent weeks have hinted at a possible future regional architecture that could be the basis for long-term peace. Discussions revolve around the Gulf states and Iran managing their own affairs without the destabilising intervention of outside powers.
That is a long way from realisation, and could depend on what the final MoU says about Iran’s regional proxies. But at least the conversations are happening, and that alone marks a shift.
You could argue that the oil market has overdone the good news. Brent in the low 80s is not pricing in these uncertainties, nor is it pricing in the eventual need to replenish strategic reserves, which have been drawn down heavily across consuming nations since March.
For now, the consensus is for a 30- to 60-day window of gently falling or flat prices, followed by a recovery through the rest of the year. That seems about right, provided the ceasefire holds and the MoU provisions are agreed and implemented.
But those are very big provisos.