Impact of Iranian War Truce on Global Oil Economy

The preliminary agreement to end the war in Iran and reopen the Strait of Hormuz is expected to positively influence the global economy. Despite a recent drop in oil prices, uncertainties linger about the timeline and methods for resuming oil flow through a major energy shipping route. Before the conflict, the strait handled one-fifth of global oil supplies. Currently, numerous ships are stalled in the Persian Gulf, and oil-producing nations need time to restart operations. Analysts also warn that vessel captains might hesitate to enter the strait if security concerns persist.

Oil prices, inflation, and energy flows will take weeks or months to return to pre-war conditions. This depends on the durability of the agreement set for signing soon. Even with the strait fully operational, any delay in loading and transporting oil to Asia, a key market for countries like Saudi Arabia, Iraq, Bahrain, UAE, Kuwait, and Oman, could affect return to business as usual. Trips to Japan, including the return journey, can take up to 50 days. Given ongoing volatility, captains, insurers, and shipowners may proceed cautiously.

Richard Meade, editor of Lloyd’s List, noted the maritime sector’s slow revival, highlighting the necessity of clearing mines and resuming recognized transit routes for safe navigation. Currently, ships are moving through a northern verification channel managed by Iran, while others using stealth tactics under U.S. guidance traverse a southern route near Oman. Iran had threatened attacks on vessels using internationally established central transit lanes.

According to maritime and energy intelligence firm Kpler, roughly 500 commercial vessels remain in the Gulf, too many to leave simultaneously through the narrow channel. Amena Bakr from Kpler estimates that mine clearance will require up to six months; vessel turnaround could take an additional two to three months; and restarting production to pre-war levels might take another three months.

Clarification Needed on Open Strait Status

Disagreements between the U.S. and Iran persist on strait operations. Iran demands fees from ships transiting the strait, a practice reportedly already enforced in some cases. While former President Trump announced a toll-free agreement, no confirmation has come from Iran. This interim period allows both parties to issue conflicting statements on management and fees, noted Torbjorn Soltvedt of Verisk Maplecroft.

Shipowners face a dilemma, as paying tolls could violate international sanctions against Iran’s Revolutionary Guard, deemed a terrorist organization by the U.S. and EU. Legal experts argue Iranian control violates international maritime law on free navigation, as outlined in the United Nations Convention on the Law of the Sea, which mandates countries allow peaceful passage through territorial waters. The waters of the strait are shared by Iran and Oman.

Time Required for Oil Producers to Resume Operations

Some Middle Eastern producers halted oil extraction when storage capacity maxed out. Restarting operations is often gradual. Countries like Saudi Arabia and the UAE, with alternative pipeline options, may resume operations faster, according to Alan Gelder of Wood Mackenzie. Iraq faces more challenges, given its longer stoppage and complex fields, possibly needing about a year to recover.

Claudio Galimberti from Rystad Energy observed improved morale but noted that sentiment differs from supply. Time is needed to boost production, normalize logistics, and reduce risk premiums in crude prices. Producers will await confirmation of the strait’s secure status and a ceasefire lasting over 30-60 days before ramping up activities, Daniel Sternoff of Columbia University’s energy policy center stated. Capital Economics projects energy flows might reach 80% of pre-conflict levels by September.

Inflation Remains a Concern

Even if the strait reopens soon, inflation will not fall immediately, economists warn. Neil Shearing from Capital Economics predicts inflation will exceed targets in most major economies this year and into the next, as growth stays weak. As temporary government measures to contain energy shocks expire, inflation could rise, said Joachim Nagel, president of Germany’s Bundesbank. For instance, Germany’s temporary fuel tax cut ends in June, impacting costs.

Complete oil supply normalization may take months, Nagel noted.