Deal or no deal, oil prices will stay high for months

The traders may be getting ahead of themselves. Wary buyers are not yet placing large orders for Gulf crude, notes Tom Reed of Argus Media, a price-reporting agency. Even if the deal holds, normalisation requires tankers not just to leave the Gulf but to start returning, production to restart and refining to ramp up worldwide—all of which will take time. A nervy summer beckons.

For lots of oil to start flowing again from the Gulf, the strait must first be cleared of mines. A map issued by the IRGC, Iran’s elite fighting force, and seen by The Economist, suggests they have been laid precisely where ships usually sail. Alternative lanes, along the Iranian and Omani coasts, are dangerous and narrow. Few ships brave them (see chart 1). America has mine-clearing vessels in the region, and Britain and France have offered to help what is left of Iran’s navy.

Intrepid vessels will attempt passage before then. One Greek shipowner says he will do so shortly. Some insurers are cutting top-up premiums for Gulf voyages by 50% for some clients, says John Ollett of Argus. Mercuria, a Swiss trader; a Chinese importer; and a Vietnamese refiner are looking for vessels to lift Gulf oil in the next ten days. But most shipowners may wait for the conduit to be made safe, which could still take six weeks or more. It would normally take no more than 10-15 days for the 118 laden tankers currently idling in the Gulf to exit, according to Kpler, a ship-tracker. Flushing them out as demining happens will be considerably slower.

As tankers return, Gulf producers will start pumping again. They have reported no severe damage to their fields. And, having curtailed output when storage was around 50% full, most have the flexibility to ramp up before maritime bottlenecks are fully resolved. Large fields with lighter crude, mostly in Saudi Arabia and the United Arab Emirates (UAE), will be the first to restart. These should reach pre-war production within three months, says Frédéric Lasserre of Gunvor, a trader.

Most analysts expect overall Gulf production to reach 30-50% of February levels by mid-July, 60-70% by mid-September and 80-90% by the end of the year. In this scenario Brent would edge towards $75 a barrel. Prices in the Gulf and outside it, which diverged when the strait was first shut, are converging again (see chart 2).

Still, the pre-war world of abundant oil is a long way off. For one thing, even if outbound vessels start crossing Hormuz soon, inbound ones may not return in full for four or five months, predicts BRS, a ship broker. The 50 or so of the biggest crude carriers waiting outside the Gulf or off the Indian coast can load only about two weeks’ worth of pre-war Middle Eastern exports. Many ships that migrated to safe and lucrative Atlantic routes when the war started must complete their current voyages and will wait for Gulf freight rates to rise before heading back. Insurers will lower premiums only when freedom of navigation is guaranteed and large operators have been crossing the strait for weeks, says Ellis Morley of Howden, an insurance broker.

There is also the question of tolls. Mr Trump says Iran has agreed not to levy any for 60 days. But Iran has hinted it may charge “fees” instead. It has already created the Persian Gulf Strait Authority (PGSA) to manage the system and in late April its central bank confirmed receipt of the first tranche of revenue. A bill allocating 30% of the proceeds to Iran’s armed forces, including the IRGC, is steaming through parliament. Their recent communications suggest they view managed traffic as the new normal and unrestricted passage as the aberration, says someone familiar with their politics. Yet unless the peace deal involves revoking American sanctions on the PGSA and the IRGC, anyone paying them risks being blacklisted by America. This would deter all but the dodgiest operators.

All this means supply is likely to remain constrained for a while even after a real truce is reached. What is more, traders expect America to cancel its next release from emergency stocks in light of the MoU, which would deprive the world of 1m b/d in exports. Demand, which normally rises in the summer, may return much more quickly on news of an end to hostilities. China, which has cut crude imports by a spectacular 5m b/d—roughly 5% of global supply—may be first in line.

Morgan Stanley anticipates an oil-supply deficit of 3.4m b/d in the third quarter of the year, draining already record-low global stocks at a rate of 2.1m b/d and keeping prices high (see chart 3). The bank forecasts that “dated Brent”, as oil to be delivered in the next few weeks is known, will average $90 between July and September and $80 in the last three months of the year. That is $20 more than it predicted in February for the same period. If governments decide to refill their strategic reserves—or, for those without such stocks, to build them—this may add up to 2m b/d to global demand next year.

The prices of refined products are even harder to predict. Outside Japan and South Korea, which have ample crude, Asian refiners must wait for Gulf supplies to arrive. In the Gulf itself, Iranian strikes have damaged several big refineries; throughput may take months to recover. Further delays to product shipments could drain stocks in Africa (starved of petrol), Asia (a big importer of naphtha, a plastics feedstock, and LPG, a cooking fuel) and Europe (reliant on the Gulf for jet fuel and diesel). American refiners, having switched to diesel and jet fuel for export, may now swing back to producing petrol for the home market—but domestic stocks are so low that prices at the pump may stay high for a while, or even rise again.

And the risk that Iran reasserts control over Hormuz—or, worse, that the fighting resumes—may add a premium of up to $10 a barrel to world oil prices for a long time to come, reckons Rystad Energy, a consultancy. Mr Trump may have stopped his Iranian misadventure in time to avoid a catastrophe. But some of the damage it has inflicted on energy markets may never be undone.