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The United States and Iran have agreed on a process that could result in the end of their armed conflict and the reopening of the Strait of Hormuz. Both countries have signed the agreement, U.S. officials told reporters, though the text itself has yet to be released.
The markets, at least, are taking the deal and the promises that the strait will reopen at face value. Benchmark oil prices are now at around $83 per barrel, down slightly from $87 Friday, when traders expected that the U.S. and Iran would soon reach a deal.
“I hereby fully authorize the toll free opening of the Strait of Hormuz, and, simultaneously herewith, authorize the immediate removal of the United States Naval blockade. Ships of the World, start your engines. Let the oil flow!” Trump posted Sunday afternoon on Truth Social.
But that will not happen immediately. No matter what the United States and Iran say, it’s shippers and insurers who will make the final determination of whether the strait is truly open.
For that they will need assurances that Iran means it when it says that vessels are free to sail through, and that it won’t try to impose tolls or force ships through specific routes. “Are the Iranians going to try and control passage?” Robin Mills, chief executive officer of Qamar Energy and non-resident fellow at the Columbia University Center on Global Energy Policy, a consulting and advisory firm in the United Arab Emirates, asked me rhetorically.
This need for evidence of good faith on both sides was a theme of my conversations about the peace deal on Monday.
“The key problem isn’t whether or not the Iranians or the U.S. says the strait is open,” oil analyst Rory Johnston told me. “It is whether shippers — ships that are trapped in the Gulf, as well as ships that are waiting to move into the Gulf — have made the determination that the strait is safe for transit.”
Though some countries were able to divert substantial flows through pipeline networks to avoid the strait, that represented a relatively small amount of Gulf oil production. Johnston has estimated that of the 20 million barrels per day of oil and products that flowed through the Strait before the war, some 13 million to 15 million barrels per day worth of production have been “shut in,” meaning that they were never extracted from the ground.
Even with a peace process underway, the Gulf oil complex won’t be fully operational until ships can first get out of the Strait of Hormuz unencumbered, then get back in to pick up oil shipments, which Johnston estimates won’t happen until the beginning of next month. Some of this is just a judgement call, one that some shippers had already made before the weekend’s announcement.
“There’s been a fairly steady stream of ships that have been exiting the strait by going dark and traveling at night,” Johnston said, “so there is already an understanding for some shipping companies and some regional states that you can transit the waterway safely.”
The number of ships chancing a transit roughly correlates with the temperature of the rhetoric between the U.S. and Iran over the past few weeks. “A total of 29 verified vessel crossings were recorded through the Strait of Hormuz between 10 and 14 June,” according to the maritime analytics service Kpler said Monday. “The data aligns with reports of progress in U.S.-Iran discussions and supports the assessment that the Strait remains operational, although traffic volumes, route transparency and directional balance have yet to return to a clearly normalised pattern.”
The volumes getting through are still far off their pre-war totals, however. In the first two weeks of June, J.P. Morgan analysts estimated Hormuz flows at just over 5 million barrels per day, although about a sixth of that was likely Iranian shipments at risk of being interceded by the U.S. blockade. While that an improvement from around 3 million barrels per day in April and March, it was still well short of the 15 million to 20 million barrels per day of crude oil and petroleum products flowing through the strait before the war began in February.
The ships that have sailed the strait have largely hugged the Omani coast, according to Eurasia Group energy analyst Greg Brew, or else going through close to the Iran side, which is directly controlled by the country’s military. Three months’ worth of shooting (and mining), however, have made the central artery a no go. “There’s no certainty as to whether there are mines, how many there are, and where they are, and that matters in terms of restoring security of transit through the main waterway,” Brew told me.
The portions of the channel that offer safe passage “are not good routes for the largest ships, especially for big container ships and the largest tankers,” Brew added. Clearing the strait will likely involve navies from outside the region, including European fleets and “potentially” China, he said, many of which have ships in the area “specifically equipped for clearing mines.”
That process is likely to be iterative, Johnston told me. “It’s not like there are mines or there are not mines across the entire area,” he said. Instead, he told me, certain widths of the strait will be judged to be mine-free, allowing for safe passage, and that width will expand over time. Brew estimated that it will take two to three weeks to complete that process.
Getting the tankers back in should give oil producers the confidence to restart operations, Johnston said. “But then the challenge becomes how much upstream infrastructure was damaged,” he said. Even if the extraction infrastructure is functional, so-called “downstream” refining infrastructure could still be down, meaning that crude oil production could recover before refined products like gasoline or petroleum liquids begin returning to their previous levels.
As for how long it will take to get back up to full production, Brew told me that will vary country by country. In the short run, Gulf oil producers can pull from existing inventories of oil, with Saudi Arabia and the United Arab Emirates, which never fully shut down production, getting back to full flows in a few weeks. Iraq and Kuwait, which had to more severely curtail production, may take a few months.
Governments and companies will eventually have to rebuild their oil and natural gas stockpiles after drawing on them extensively to keep fuel prices from spiking. Among rich nations, inventories have sunk to levels not seen since depths of the post-9/11 conflict in 2003, according to the U.S. Energy Information Administration. The United States’ Strategic Petroleum Reserve had around 415 million barrels of oil before the war began, and has since fallen to around 350 million barrels, the lowest level since 1983.
All told, Johnston told me, “well over” a billion barrels of global fuel reserves have been used up since the war began.
Refilling these inventories — or, for countries newly interested in energy security, establishing them — will be a long-run addition to demand for oil, which could keep prices from falling as sharply as they might have otherwise. “We’re probably going to have two, three years of structurally higher demand as people try to restock,” Johnston said.
But the course of the war has defied risks of prices spiking higher. “This war was the biggest supply disruption in history, and oil had a hard time staying above $100 a barrel,” Brew said. “That implies that the structural factors inside the market are more keeping prices low than pulling prices high.”
