Oil Quiet? Not Quite

It’s not a deal till it’s signed, and there will be risks even after, so don’t count your barrels yet

Trump gave himself a birthday gift on Sunday, but unpacking it will take a while. Is the war on Iran really over? That’s the second question on top of everyone’s mind. The first is, will oil go back to $73, where it was before Feb 28? The answers are ‘maybe’, and ‘probably not’, respectively. Here’s why.

As for peace, neither US nor Iran has appeared keen on fighting since April, never mind Trump’s wild rhetoric. Still, tensions and the Hormuz blockade have persisted because of Israel’s actions. So, Trump’s ability to rein in Netanyahu is the biggest if. But there are others, too, like Iran’s stand on nuclear enrichment. The nuclear question isn’t part of the agreement that both sides will sign this Friday. For that, they’ve given themselves 60 days. Much can go wrong in two months, or between now and Friday. Hence, permanent peace remains a maybe, even though markets have strongly signalled faith. Stocks are up, dollar’s down, so is oil.

But markets are fickle. They have swung many times already in the past three months. What’s notable, though, is oil’s gradual slide towards $80, from a high of around $120. If traders are willing to book long-term contracts at a lower rate, there’s reason to hope the worst of the crisis is over. That said, the dip from $80 to $70 won’t happen overnight. Nor can captains of stranded vessels heed Trump’s call: “Ships of the World, start your engines. Let the oil flow!” Even if US and Iran lift their respective blockades on Friday, the 500-odd ships stuck in Persian Gulf can’t exit immediately. Given that the Strait is mined, their passage will have to be carefully controlled. Removing all mines might take months.

Good news is that those vessels are laden with over 100mn barrels of oil, and Gulf countries – unable to ship oil and gas since Feb – are sitting on inventories. So, whenever shipping normalises, massive amounts of oil and gas could flood markets. But…prices won’t fall, as buyer countries will rush to fill up their depleted strategic reserves. Also, now that markets and insurers have seen what Iran can do with Hormuz, they might price in a premium to cover future risks. Gas prices might stay high even longer, because Qatar needs 3-5 years to repair its damaged LNG capacity. Overall, peace will ease pressure on the global economy, but a quick return to Feb’s prices is unlikely.