Oil’s Brief Respite from Conflict: A False Sense of Security?

The Memorandum of Understanding (MoU) between the US and Iran has expired, plunging oil markets into uncertainty. Recent data from Kpler shows that oil flows through the Strait of Hormuz nearly tripled during the 60-day window covered by the MoU, averaging 6.1 million barrels per day.

This increase is significant, but it’s essential to put these numbers into perspective. The Gulf has seen consistently low oil exports since the US-Iran conflict escalated in February. Between April and June 17, when the MoU was signed, an average of only 2.3 million barrels per day were exported via the Gulf. This is a far cry from pre-war levels, which saw around 15 million barrels transiting the Strait each day.

The expiration of the MoU has already had consequences for oil markets. On Thursday, Brent crude futures edged higher, with prices up about 0.3 percent at $91.93 per barrel as of 06:00 GMT. This slight increase may indicate that market participants are factoring in the risks associated with the ongoing impasse between Washington and Tehran.

Oil flows rebounded quickly during the MoU, with more than half of shipments occurring in the first three weeks of the agreement. Emmanuel Belostrino, head of Global Crude and Geopolitical Market Data at Kpler, noted that “by the end the flow was thinner, darker, and re-accumulating behind the chokepoint.” This phenomenon speaks to a larger issue: the temporary reprieve offered by the MoU did little to address the underlying problems plaguing the region.

The expiration of the MoU marks a return to uncertainty for oil markets. Until there is clearer evidence of sustained, safe transit and a more durable diplomatic framework, confidence among operators will likely remain low, according to Tim Waterer, chief market analyst at KCM Trade. This lack of confidence has significant implications for global trade, particularly given the critical role that the Strait of Hormuz plays in the world’s energy supply chain.

Recent attacks on commercial vessels in the region serve as a stark reminder of the risks associated with this conflict. At least 18 seafarers have been killed in attacks on commercial vessels since the US and Israel launched their war on Iran in late February, according to the International Maritime Organization. This toll highlights the human cost of these conflicts, as well as the importance of addressing the root causes rather than just treating symptoms.

Policymakers must reassess their approach in light of this context. The temporary reprieve offered by the MoU provided a brief respite from conflict but did little to address the underlying issues driving tensions in the region. It will be crucial to prioritize diplomacy and engage in meaningful dialogue with all parties involved as we move forward.

The stakes are high, not just for oil markets, but for global trade as a whole. The next steps taken by policymakers will have significant implications for the future of energy supply chains and the safety of seafarers who keep them moving. It’s time to stop treating these issues as isolated incidents and start addressing the complex web of factors that drives conflict in the region.

The expiration of the MoU marks a return to uncertainty for oil markets, but it also presents an opportunity for policymakers to reassess their approach and work towards a more durable solution. As the global community continues to grapple with the challenges posed by this conflict, one thing is clear: the stakes are too high to settle for anything less than a sustainable, long-term resolution.