The US and Iran have signed a deal to extend the 60-day ceasefire and reopen the Strait of Hormuz ahead of schedule. The surprise was met with cautious optimism in the market, as many uncertainties remain. Brent dipped to $70 per barrel, but has moved higher. Overall, risk appetite remains muted as markets digest a more hawkish Fed, which seems to be overpowering any optimism from the deal.
It’s only been a few hours, and already there are signs that the deal might not last. US President Donald Trump threatened to resume strikes if Iran didn’t “behave”. Analysts noted that the deal was signed by Iran’s President, and not the Supreme Leader. Afterwards, Iran’s top negotiator and Parliamentary Speaker Mohammad Qalibaf implied that there would still be tolls for transit through the Strait. This left the market less confident that the deal would last.
What’s Actually in the US-Iran Deal?
Following the signing, both sides released the text of the agreement, which was essentially identical to the 14-point plan that was leaked to the media on Tuesday. The elements that are of primary concern for the markets related to oil exports. The plan established that the US would immediately end its blockade of Iran and would also immediately lift sanctions on Iranian oil exports. Iran, for its part, would “take steps” to assure passage through the Strait of Hormuz. The reopening could potentially take up to 30 days. The US will immediately extend waivers to allow Iranian oil shipments and lift embargos once a deal is reached. This could bring as many as 3 million barrels per day onto the crude market as Iran ramps up production.
With the deal taking effect immediately, the implication is that the Strait of Hormuz is now open to traffic. However, trackers show no movement of crude ships, even in so-called “dark” transits, where ships turn off their trackers while passing through the Strait. Analysts warn that it could take a few days to work out the logistics of resuming shipments. It is estimated that around 160 million barrels of crude are currently held in the Gulf and ready for shipment, but it will also take time for empty carriers to reach the region.
Why Markets Aren’t Buying the Deal
While the initial reaction was positive, markets have taken a cautious approach. Part of the agreement entailed a ceasefire between Israel and Hezbollah, but both have launched attacks at each other in the subsequent days. Iran has been adamant that a ceasefire deal would cover the conflict in Lebanon. Prior to the release of the text, it appeared that both sides held different views on their obligations. Now it seems they are using different interpretations, which could lead to additional friction, particularly around the toll issue.
In any event, analysts note that it will take several weeks for the market to normalise. While some anticipate that crude prices might fall in the medium term, there could be increased demand in the short term as inventories are refilled. For example, the US Strategic Petroleum Reserve has fallen to its lowest level since 1983.
Where the markets are headed
Despite the deal, crude prices are still above the $70 level they were the day before the hostilities began. And crude prices had risen in the days before the conflict as investors priced in rising tensions in the region. That means markets are still pricing in a chance that the deal will fall through.
On the other hand, the IEA is now forecasting a massive oil surplus for next year, taking into account the expected increase in production from Iran. However, logistical hurdles must be overcome as the market shifts back to transporting crude through the Strait. It will take at least a month for the first shipments of crude out of the Gulf to reach customers in Asia, meaning the market could remain in flux until mid-July.
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