Is the Iran war just an energy shock?
The Iran war's disruption to global crude oil and LNG markets is already being measured in lost barrels and higher prices. Now, with a U.S.-Iran
The Iran war's disruption to global crude oil and LNG markets is already being measured in lost barrels and higher prices. Now, with a U.S.-Iran peace deal expected to reopen the Strait of Hormuz, the reckoning begins: was this a watershed moment, or merely another blip? Consider two precedents. The Volkswagen "Dieselgate" scandal over rigged emissions tests in 2015 seemed innocuous at first, but signalled the demise of diesel passenger cars and the rise of electric vehicles (EVs).Also read: US at odds with allies over how easy it is to reopen Hormuz By contrast, Russia's 2022 invasion of Ukraine caused a dramatic surge in energy prices, yet the market's ability to reroute flows and absorb the shock meant the impact proved short-lived. Certainly, the market has so far worked its magic in dealing with the effective closure of the Strait of Hormuz since the U.S.-Israeli attacks on Iran began on February 28. At least 1 billion barrels of crude oil and refined products have been lost from Middle East producers such as Iraq, Kuwait, the United Arab Emirates and Iran itself. As much as 20% of global liquefied natural gas supply is also trapped in the narrow waterway between Iran and Oman. A combination of strategic and commercial inventory releases and a dramatic reduction in imports by China, the world's biggest crude importer, has helped keep benchmark Brent crude futures under $100 a barrel for much of the current crisis.
It could also be argued that optimism about a deal to reopen the Strait has played its part, with traders seemingly willing to believe President Donald Trump's numerous social media posts that an agreement was imminent. That long-awaited deal began to materialise on Sunday when the U.S. and Iran announced they had agreed on a framework that could allow vessels to resume transit. By Monday, Trump said oil tankers were starting to move out of the Strait. While full details of the agreement have yet to be publicly revealed, the prospect of tankers soon entering and exiting the waterway without hindrance raises the question of what happens next. The first effect would be a short-term sugar hit of relief for energy markets as tankers trapped in the Gulf exit and deliver cargoes. This would be followed by efforts to restore flows and supply chains to pre-war levels, and by the longer process of rebuilding depleted inventories. This could mean crude oil and LNG prices stay higher for longer as the lost barrels are replaced, but much will depend on how rapidly Middle East producers are able to ramp up output and exports, and whether the OPEC+ group is actually able to pump the higher volumes it has agreed to produce.Also read: Goldman Sachs cuts India's 2026 CAD forecast to 1.3% of GDP BEHAVIOUR CHANGES? But the bigger question is what the long-term impact will be.
The BriefWire