Four months into the conflict between the US and Iran, there finally seems to be a light at the end of the tunnel, although it looks more like a flickering flashlight. One day, sides are signing a memorandum of understanding, the next, the Iranian delegation walks out of talks with the US after new threats from Trump.
Still, looking at oil prices, the S&P 500, and the Dow Jones indices, markets seem to be leaning toward a more positive outcome. And indeed, reports of a partial easing of the naval blockade on Iranian ports and the reopening of parts of the Strait of Hormuz, along with claims that three fully loaded oil tankers linked to India passed through, seem to back that up.
But what about the delayed demand effect? Shouldn’t that be supporting prices?
In theory, yes. According to Kpler, around 1.15 billion barrels of supply were disrupted during the war. At the same time, countries drew heavily on strategic reserves to avoid buying at peak prices. US crude inventories, for example, fell to 340.3 million barrels, the lowest since 1983.
On the other hand, oil bears argue that some flows may still have been moving covertly along the Omani coast even during the blockade. On top of that, the UAE’s exit from OPEC+ adds long-term supply-side upside pressure, and if sanctions on Iran are lifted, production could ramp up quickly.
And most importantly, even the IEA expects that by 2027 supply will rise by about 8 million barrels per day while demand grows by only around 2 million, implying a potential surplus of more than 5 million barrels per day.
The thing is that OPEC Secretary General Haitham Al Ghais said the IEA’s numbers are not grounded in reality. It is also worth noting that any US-Iran deal could still fall apart.
In the end, time will tell who is right. For now, one should keep in mind that the surge in energy prices from the Hormuz disruption has already fed through the system, forcing central banks to tighten policy, potentially including the Fed.
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