At the end of it, this will be framed as a “deal to put an end to the conflict”. However, what it actually will be is a memorandum of understanding to lay out the necessary preconditions to facilitate nuclear discussions. And that means extending the actual negotiations phase by another 60 days.
Markets remain optimistic on the face of it but looking through it all, a lot will depend on what happens with the Strait of Hormuz.
While the US and Iran are still squabbling about some details, both sides know very well the puzzle pieces that are needed to complete the picture. The only question is if they can fit them all together and make it last for 60 days or longer. It’s going to be tough but I wouldn’t be surprised if we see some empty promises get put out just so both sides can create an illusion of moving forward. You can read more on that below:
For markets, the biggest concern remains the threat to the inflation outlook. In that lieu, energy prices and oil and gas supply remain the most critical factors at the moment. As such, the reopening of the Strait of Hormuz is the most important detail.
The US wants an unconditional reopening of the waterway i.e. resumption of traffic akin to pre-war conditions. Let’s be real. That is not going to happen.
Control over the strait remains Iran’s biggest and most important leverage in talks. If they allow the waterway to reopen fully, they are basically just giving up on the conflict and there’s no need for nuclear discussions. Without any leverage, the US can just bully Iran into any terms without any pushback.
So, what is going to happen here instead?
I would wager this is how things are going to play out. The US and Iran will tell a story that they have taken the next step to “end the war”. The Strait of Hormuz will reopen slowly as “Iran will need time to clear mines along the waterway”. This may take up to 30 days or perhaps more. There will be no tolls charged.
This allows US president Trump to brag about “winning” while at the same time allowing Iran to keep management of the strait.
Iran will then continue feeding data, as they have been doing recently, that traffic along the strait is picking up. But in reality, that is not the case. They are merely trying to play to the optics of a deal, making it so that the US has something to brag about back home.
In essence, it will be a theatrical performance just so that the politics will cloud market judgement long enough before reality slaps hard.
The actual shipping data is not likely going to corroborate with the narrative here. So while market prices will reflect one story, physical prices and what businesses/consumers are paying will be a different story.
All this while global oil market supply continues to tighten further into the summer, and that’s when the pain will really hit hard for many economies as well.
It’s a case of kicking the can down the road long enough in hoping markets will forget about it. Let’s see how that is going to work out.
