Ceasefires and aborted negotiations have alternated after short periods. Successive blockages of the Strait of Hormuz keep the Middle East unstable. At this stage, investor nervousness appears well justified.
The U.S. president faced Iranian resistance. Disruption of the Strait threatened the global economy. He seemed ready to escalate militarily, with plans for air strikes and potential ground deployment.
Donald Trump announced a two-week suspension of military operations in a last-minute reversal. This pause allows for negotiations with Iran. In return, Iran committed to fully reopening the Strait, while keeping control.
The announcement triggered a strong market reaction. Oil prices, which had been reaching new highs, fell by 15%. Equity markets rebounded broadly. Banks, luxury stocks, and cyclical sectors benefited. Defensive assets were less sought after. Bond yields also declined.
Negotiations cut short
Although the ceasefire was welcomed, it is likely to be short-lived. A lasting agreement between the United States and Iran has always seemed unlikely, given the divergent positions.
The rapid breakdown of negotiations confirmed this assessment. Tehran’s ten-point proposal included demands. These included lifting international sanctions, Iranian control over the Strait of Hormuz, withdrawal of U.S. forces from the region, and recognition of Iran’s rights to nuclear enrichment.
These conditions are unacceptable for the United States, and even more so for Israel. Israel has long opposed Iran’s nuclear ambitions. The issue of compensation is also contentious. Iran proposed tolls on passage through the Strait, aiming to generate USD 90 billion annually for reconstruction. Countries relying on the Strait would likely resist such a precedent.
Normalisation will not occur any time soon
After negotiations failed, the United States announced it would also block the Strait. The rationale is straightforward. If the Strait is to be closed, it will control access.
This move could deprive Iran of hydrocarbon export revenues. It could also limit competitors, such as China, from accessing Iranian oil. At the same time, it might push oil prices higher and encourage greater involvement from U.S. allies.
Significant uncertainties remain. Would the United States intercept vessels from China, India or Europe that paid passage fees to Iran? On what legal basis? With what consequences? It is difficult to envisage China accepting such actions against its flagged vessels.
A rapid return to normal conditions, therefore, appears unlikely. Even with progress, the normalisation process would be gradual. With a maximum of 200 ships able to transit daily, clearing the backlog of vessels would take weeks.
After forty days of conflict, global energy markets have been disrupted. Hundreds of millions of barrels are missing. Restoring balance will take time. Damaged infrastructure may require years to repair.
Lasting Consequences
Amid this uncertainty, oil prices remain above USD 100 per barrel. The energy shock is already feeding into inflation. Household purchasing power is reduced, and consumption is lower.
The broader economy is likely to weaken, as are corporate earnings. A rapid normalisation of energy markets is unlikely, and prices may remain elevated. GDP growth in the second quarter is expected to be disappointing due to the conflict, and could remain so if tensions persist.
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