Paragraph 5:

Upon the signing of this MOU, the Islamic Republic of Iran will make arrangements, using its best efforts, for the safe passage of commercial vessels with no charge for 60 days only, from the Persian Gulf to the Sea of Oman and vice versa. The traffic of commercial vessels will immediately start, and considering the need for removing the technical and military obstacles, and demining by the Islamic Republic of Iran will be instated within 30 days. The Islamic Republic of Iran will conduct dialogue with the Sultanate of Oman to define the future administration and maritime services in the Strait of Hormuz, in discussion with other Persian Gulf littoral states, in line with the applicable international law and the sovereign rights of coastal states of the Strait of Hormuz.

This is the contested provision in the Memorandum of (Mis)Understanding signed by Iran and the US on June 17, which led to the reopening of the Strait of Hormuz. It is vague, perhaps intentionally so, awkwardly drafted, and wide open to interpretation. In the IRGC's Farsi, it means that Iran is responsible for overseeing maritime traffic; therefore, vessels must be directed north of the agreed maritime boundary, or bear the consequences. Tolls may be charged after the initial 60-day period. In Trumplish, however, it clearly states that the Strait is unconditionally open, ships may choose whichever transit corridor they wish to use, as long as it is the southern one, and no fees may be imposed unless they are introduced as part of a US initiative.

The point is that the two-page document was always susceptible to abuse, especially given that unilateral control of the passageway runs contrary to established maritime law and international conventions. There is little doubt that, at some point, the truce will be restored and maritime traffic, whether on paper or in reality, will resume. Yet, as the market has been reminded so vividly in recent weeks, that stability is unlikely to endure, and flows through this vital chokepoint will remain vulnerable to disruption.

The current situation shows no signs of imminent de-escalation. Reciprocal strikes on Iran and US military sites in the region continue. After Iran's staunchest ally, the Houthi group, announced a naval blockade in the Red Sea, three Saudi oil tankers bound for China and India reportedly turned their backs on another key regional shipping artery, the Bab el-Mandeb Strait, and instead headed toward the Suez Canal. The IEA has warned of the threat the conflict poses to energy security. Crude oil rallied by another $2/bbl, with Brent settling at its highest level since June 10. Refined products also advanced, keeping crack spreads at elevated levels. Another $1/bbl has been added to the recent gains overnight as the US launched strikes on Iran for the 11th consecutive day, while President Trump threatened to attack the country’s nuclear facilities shortly.

Does the latest flare-up entail another spike above $100? Judging by how impressively the initial shock was absorbed, perhaps not. It is worth reiterating the remarkable adaptability that helped prices fall from above $120 to around $70 after the initial surge. As Energy Intelligence summarized a few weeks ago, several factors cushioned the blow: comfortable inventories entering the conflict, the effective use of alternative transportation routes in the Persian Gulf, rising non-OPEC+ supply, releases from the Strategic Petroleum Reserve (SPR), sanctions waivers, the expansion of the dark fleet, and demand destruction, including a massive 5 mbpd decline in Chinese crude oil imports between February and May. Collectively, these factors went a long way toward stabilising the market.

This should serve as a cautionary tale for those who assume there is only one direction for oil prices whenever the conflict intensifies, and the Strait metaphorically shuts its doors, and it is up, correct? Let us see:

•    The latest EIA Short-Term Energy Outlook puts OECD inventories at 2.603 billion barrels in June, down from 2.824 billion barrels at the end of February.
•    US commercial crude inventories declined from 1.271 billion barrels to 1.204 billion barrels over the same period.
•    At 311.4 million barrels, the US Strategic Petroleum Reserve stands at its lowest level in 43 years, according to the Department of Energy.
•    The US has reimposed sanctions on Iranian oil exports, while sanctions waivers related to Russian oil expired last month and product exports are under the cosh.
•    A Houthi naval blockade, if enforced, could close the Bab el-Mandeb Strait, effectively preventing Saudi oil from reaching Asian customers. Bombing the East-West pipeline would put 5 mbpd of Saudi oil exports in jeopardy.

Oil inventories have been significantly depleted over the past three to four months. If oil fields and refineries across the region are forced to shut down because crude oil and refined products cannot be shipped during a prolonged closure of the Strait, with alternative routes also unavailable, the longer-term implications could be severe. Admittedly, demand destruction resulting from persistently high oil prices, subdued Chinese imports, and the increasing adoption of renewable energy may partially offset the disruption to the oil balance. Nevertheless, it is difficult to dispute that today's baseline outlook points to a much tighter inventory position than the one that prevailed in March.

Iran has discovered that the Strait of Hormuz provides far greater strategic leverage than its nuclear programme. With little prospect of a lasting peace, and even a durable ceasefire appearing improbable, it places the US in a difficult position. Washington cannot simply withdraw; doing so would amount to a public humiliation. Removing the Iranian regime, while not impossible, would likely require troops on the ground and months of military operations, potentially pushing oil prices well above $100. If one views this conflict as a chastity belt on US foreign policy, the economy, the Administration, the Republican Party, and the upcoming midterm elections—an instrument supposedly designed to preserve virtue but one that ultimately impedes fecundity—then one might conclude that any meaningful change to the current status quo is unlikely before November. Until then, umpteenth closures and reopenings of the Strait are likely to dominate market sentiment, keeping oil prices within a broad $70–$100 range, possibly closer to the top end.

Overnight Pricing