Hormuz Trade Will Take Months to Recover Despite U.S.-Iran Deal

• While oil markets have reacted with enthusiasm to an interim agreement between the U.S. and Iran, which should reopen the Strait of Hormuz and restore oil and gas flows, analysts warn that a return to normality could be months away.
• A US-Iran deal will ease supply risk, but rebuilding confidence among shipowners, insurers and refiners will take longer. Many buyers have already adapted to the disruption by securing alternative supplies and routes, meaning there will be no straightforward return to pre-war trade.
• Shipping activity is expected to recover gradually, as some companies have indicated that they will wait until the deal is formally signed before attempting to cross the Strait. Meanwhile, insurance requirements, mine-clearing operations, and port congestion could further delay the recovery.
• Middle Eastern producers have been forced to shut in more than 10Mn barrels per day of oil production since the Strait was closed three and a half months ago. Producers will need time to fully ramp up wells, while the status of the Strait remains uncertain even if it reopens as expected.
• Production recovery is expected to vary by country. While producers such as Saudi Arabia and the United Arab Emirates may be able to restore output relatively quickly, countries like Iraq could face greater challenges after shutting in a larger proportion of production. Wood Mackenzie analysts estimate affected fields could return to 70% of prior production within three months and 90% within six months, with full recovery taking considerably longer.
• Further, analysts cautioned that oil prices could remain supported despite the agreement. Nations are expected to replenish depleted stockpiles and strategic petroleum reserves, while slower-than-expected supply recovery and continued uncertainty surrounding the deal could keep some geopolitical risk premium embedded in the market.
• Although the agreement could mark the end of the conflict between the U.S. and Iran, analysts stressed that it marks only the beginning of what is likely to be a long recovery process for the global oil and gas industry.

(Sources: Bloomberg & OilPrice.com)