Oil markets are celebrating too soon

Ending the conflict was the easy part. Rebuilding shipping routes, oil inventories and market confidence will be much harder

Markets may be celebrating the U.S.-Iran agreement, but they may be celebrating too early. Rebuilding oil flows, inventories and confidence in the Strait of Hormuz will take months and perhaps years.

The agreement was formally announced on June 14 after weeks of negotiations. Pakistan Prime Minister Shehbaz Sharif, who played a key mediating role, said both sides had agreed to an immediate cessation of military operations. U.S. President Donald Trump welcomed the agreement, calling it a major diplomatic breakthrough, while Iranian officials also confirmed the arrangement. Nearly a week later, the agreement is holding, but its durability remains uncertain.

Markets initially reacted positively to reports of an impending agreement and extended those gains after the announcement became official. Traders are now focusing less on the prospect of a deal and more on whether regional oil flows can return to normal.

Oil prices have retreated from their wartime highs as fears of a prolonged disruption to Middle East supplies have eased. While prices remain elevated compared with pre-conflict levels, the market is increasingly pricing in the reopening of normal shipping routes and the gradual restoration of regional exports.

Since the conflict began on Feb. 28, crude markets have been driven largely by geopolitical headlines. Throughout the spring,  Trump repeatedly suggested a diplomatic breakthrough was imminent, while military developments repeatedly pushed prices higher and lower. With an agreement now in place, market attention is shifting from war risk to recovery risk.

To increase pressure on Tehran during the final rounds of negotiations, Trump threatened to seize Kharg Island, the heart of Iran’s oil industry, through which roughly 90 per cent of its exports pass. He later appeared to back away from that position, telling Fox News: “I don’t know that America has the stomach for it, to be honest.”

During the final weeks of the conflict, as global demand appeared to be softening, oil shipments from the Middle East were also reported to be rising. In social media posts during the final phase of the conflict, Trump said more than 200 vessels had travelled through the strait thanks to what he described as a “secret mission” to support tankers and other ships. That apparently meant 100 million barrels were added to global supplies in the interim period.

U.S. Energy Secretary Chris Wright also supported that estimate, saying roughly seven million barrels of oil were leaving the Persian Gulf each day with U.S. military assistance.

Most likely, the ships moved through by going “dark,” meaning they turned off their tracking systems. TankerTrackers.com, a website that tracks oil trade at sea, reported ship-to-ship transfers by Gulf Arab states as they sought to obscure the origin of cargoes and move crude through the strait without being detected by Iran.

Kpler, a firm that monitors commodities markets, tracked some 96 million barrels of non-Iranian crude oil exports leaving the region since early May, either through the strait or via export routes in the Gulf of Oman, according to analyst Amena Bakr.

Including cargoes still loading, she said, exports would likely exceed 100 million barrels, “broadly consistent with Trump’s claim.”

The International Energy Agency has reinforced that view. IEA executive director Fatih Birol said this week that while a significant portion of Middle East oil and gas exports could return relatively quickly, a complete return to pre-war conditions would take considerably longer. He warned that the conflict has permanently altered perceptions of the Strait of Hormuz as a reliable energy corridor.

“The vase is broken,” Birol said, adding that the closure had permanently altered how governments and markets view the Strait of Hormuz as an energy corridor.

Governments are already reassessing energy-security strategies and examining alternative supply routes following the largest oil-supply disruption in modern history.

Even with hostilities largely halted, restoring full confidence in the Strait of Hormuz will take time. Security patrols remain active, insurers continue to assess risks and some shipping companies are proceeding cautiously until navigation conditions fully stabilize.

The agreement came at a crucial juncture. Pressure on Trump had been growing to bring the conflict to an end. With U.S. midterm elections approaching, gasoline prices above US$4 a US gallon and inventories at Cushing falling to relatively low levels, political and economic pressures were mounting. U.S. crude inventories had also fallen sharply, reinforcing concerns about supply security. Tehran faced its own economic and military pressures. Ultimately, both sides had strong incentives to reach an agreement.

The agreement represents a major relief for oil and commodity markets, but it does not mean an immediate return to normal conditions. Inventories remain depleted, strategic reserves will need replenishment and parts of the region’s energy and transportation infrastructure require repair. Shipping patterns disrupted during the conflict must also be re-established. While the geopolitical risk premium embedded in oil prices is likely to continue declining, rebuilding confidence and restoring normal market conditions will take months and perhaps years. The conflict may be winding down, but its economic consequences are likely to persist well beyond the ceasefire.

As Birol suggested, the vase may already be broken. The war may be ending, but confidence in the Strait of Hormuz could take far longer to repair.

Toronto-based Rashid Husain Syed is a highly regarded analyst specializing in energy and politics, particularly in the Middle East. In addition to his contributions to local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. Organizations such as the Department of Energy in Washington and the International Energy Agency in Paris have sought his insights on global energy matters.