Summary
Highlights
In February, the US launched an air campaign against Iran, leading to the effective closure of the Strait of Hormuz, a critical oil choke point. This resulted in attacks on ships, laying of sea mines, and major container companies suspending transit. Roughly 20% of the world's oil and LNG passes through this strait daily. The disruption stranded over 600 oil tankers, caused 46 attacks on ships, and led to a surge in Brent crude and diesel prices, as well as downstream supply chain issues for consumers.
On June 17th, the US and Iran signed a 60-day ceasefire memorandum of understanding (MOU), leading media to declare the energy crisis over and Brent crude to tumble. However, this MOU is merely a framework for negotiations, not a binding reopening order. Crucially, the US naval blockade of the Persian Gulf remains in place until negotiations conclude, a detail often overlooked by the market. While some commercial shipping has resumed, oil flows are still less than a quarter of normal levels.
Despite the MOU, a cargo vessel was struck near the Omani coast, causing oil prices to briefly jump. The International Marine Organization suspended evacuation plans, and Iran warned that vessels outside designated routes would not be guaranteed safe passage. The market largely shrugged off these incidents. While about 20 tankers carrying 35 million barrels have exited since the MOU, the full backlog of stranded oil still needs to move. The normalization of supply chains, disrupted for four months, is a complex process that the market is oversimplifying.
Normalizing a supply chain takes time. Refineries need to recalibrate, and tanker logistics must reorganize. Insurance and shipping costs, which spiked during the crisis, unwind slowly. Consumers have been absorbing an energy war premium for months, embedded in various products through transportation costs. This embedded premium does not disappear quickly when oil prices drop; it unwinds over quarters, not weeks. Grocery prices, airline tickets, and shipping surcharges remain sticky, showcasing that the beginning of normalization is not the end.
The market is celebrating the start of normalization, but the Strait of Hormuz is not yet safe. The US naval blockade is active, the MOU is temporary, and ongoing incidents risk renewed hostilities. The current market pricing of Brent crude at $74 reflects a fully resolved outcome, which is a fragile illusion. The actual situation is a 60-day pause with an active military presence and a supply chain normalization process that will take quarters. Consumers will continue to pay the energy war premium for longer than the market anticipates, as demonstrated by recent missile strikes.