Something unusual, or even strange, happened yesterday. It was not the almost $5/bbl fall in oil prices that sent Brent below $80/bbl for the first time since July 13. We have been here before. Nor was there anything particularly unusual about the trigger. It appears that talks to reopen the critical Persian Gulf passageway, the Strait of Hormuz, are gathering momentum once again. What was unusual was the source. The information did not come from Truth Social, but from the US Treasury Secretary and Qatar. Very weird.

So, how exactly did events unfold? Almost simultaneously (and perhaps in a coordinated manner?), Scott Bessent and a spokesperson for Qatar's Foreign Ministry, one of the chief mediators, informed the wider public of significant progress in talks to reopen the Strait, possibly as early as yesterday or today. Meanwhile, the US State Department said that negotiations between Israel and Lebanon had begun in earnest, while Iran and Oman were trying to resolve the details of controlling traffic through the Strait, with Iran demanding control over incoming traffic and visibility over outgoing traffic, Reuters reported.

It was an unexpected flurry of diplomatic activity indeed, although the actual flow of oil has not increased significantly, either into or out of the Persian Gulf or through the Red Sea. The key to success, as one would guess, will lie in the details. The supervision of maritime traffic and the possible introduction of toll charges are likely to be contentious issues. Referring back to the now-obsolete Memorandum of Understanding, the unfreezing of Iranian funds is also likely to prove controversial. A solid, enforceable agreement that ensures the unhindered flow of oil would put further downward pressure on oil prices in the near term. At the same time, easing concerns about renewed inflationary pressure would support both equities and bonds, as central banks might be spared the painful task of raising interest rates. Ultimately, lower prices could stimulate demand, which, together with the replenishment of depleted oil inventories, might put a floor under the decline.

Is this a reasonable scenario? Yes. However, previous rounds of talks have ended in failure and have been followed by renewed escalation. After all, this is the Middle East, with more than 2,000 years of acrimony behind it. Believe in progress when you see it.

Going Nuclear

On 22 July, the United States signed a landmark agreement with Saudi Arabia that will allow the Middle Eastern kingdom to develop a civilian nuclear programme. Every nation has the right to use nuclear power for civilian purposes and to diversify its electricity generation, even if it is one of the world's largest producers and exporters of crude oil. The deal is based on the so-called '123 Agreement', which sets out, under the US Atomic Energy Act, the rules governing the transfer of nuclear technology to another country. It legally binds US partners to non-proliferation standards. The agreement allows US companies to participate in the design, construction, and servicing of nuclear power plants in Saudi Arabia, commits the Kingdom to using US nuclear technology solely for peaceful purposes, and provides for international oversight.

The agreement establishes a 30-year framework that lays the legal groundwork for cooperation between the two nations on the peaceful use of nuclear energy. Unlike previous agreements, such as the one concluded with the UAE, the deal allows Saudi Arabia to enrich uranium domestically. It is curious to observe that, while the United States has been waging a war against one Middle Eastern nation to prevent it from enriching uranium, it is permitting another to do so.

The importance of the nuclear pact is undeniable. Yet, perhaps because of its significance, it has raised more than a few eyebrows. To begin with, there is Saudi Arabia itself. In typical Trumpian fashion, just one day after the agreement was signed, the US President took to his favoured means of communication, Truth Social, and announced that the deal was contingent upon Saudi Arabia joining the Abraham Accords, which were designed to normalise diplomatic, economic, and security relations between Israel and Arab nations. The chances of Saudi Arabia agreeing to such a move appear to be about as slim as the Kingdom's demand that Israel recognise Palestinian statehood.

Congressional lawmakers on both sides of the aisle have also raised concerns about the agreement. Republican Senator John Kennedy of Louisiana pointed to the apparent hypocrisy of bombing Iran to prevent it from acquiring a nuclear weapon while allowing Saudi Arabia to develop capabilities that could, at least in theory, be used for the same purpose. Democrats, meanwhile, have warned that the relatively relaxed safeguards could contribute to a nuclear arms race in the Middle East.

And the Democrats have a point. The agreement represents the most significant relaxation of US non-proliferation restrictions since the Nuclear Non-Proliferation Treaty entered into force in 1970. Saudi Arabia will, at least in theory, be permitted to enrich uranium, and although the agreement provides for international oversight, the International Atomic Energy Agency's ability to conduct inspections will be significantly constrained.

Iran's Fars News Agency described the deal as a 'dangerous turning point' that exposes American 'strategic hypocrisy'. Iran's Interior Ministry warned that, if the agreement triggers a regional arms race, Iran will have a freer hand than any other country. Israel's reaction echoed those of Iran and Democratic lawmakers in the United States. According to a former Israeli defence minister, allowing Saudi Arabia to develop a civilian nuclear programme will inevitably lead to the Kingdom eventually acquiring nuclear weapons and will fuel a broader arms race across the Middle East.

The agreement, which still requires Congressional approval, is probably the most significant US-Saudi accord in recent years. It helps reinvigorate the sometimes-strained diplomatic relationship between the two countries and offers Saudi Arabia an excellent opportunity to develop civilian nuclear power and reduce domestic oil consumption, thereby making more Saudi crude available for export. For the United States, the benefits include limiting Chinese and Russian influence in the region's nuclear sector while supporting the American nuclear industry and domestic manufacturing. However, the risks of nuclear proliferation and a subsequent regional arms race could pose considerable challenges to the strategic balance in the Middle East.

As the US pro-Israel and pro-democracy organisation J Street put it, the deal represents a strategic gamble by the United States. It is an effort to maintain, and perhaps even strengthen, its influence in the Persian Gulf while potentially restoring some of its tarnished reputation as a security guarantor in the Middle East.

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