Why are oil prices relatively low despite the U.S.-Iran conflict entering its fourth month?
Helima Croft: We have the largest physical energy supply disruption in history. On any given day we have between 10 and 12.5 million barrels off the market, depending on how many ships Iran lets through the Strait of Hormuz.
Yet Brent prices are below $100 – lower than during the early stages of the Russia-Ukraine war, where they exceeded $128 because of fears of a 3 million barrel-a-day disruption.
One reason is that, unlike with Russia, we started this war with very robust inventories. That has helped to shield the global economy from the worst-case scenarios. Also, we had the largest IEA coordinated stockpile release, which has provided a barrel buffer.
But now we're reaching the limits of those policies. The next weeks and months will be really important in terms of physical shortages.
Has the market grasped the gravity of the situation?
Croft: The White House has been relentlessly focused on telling the market that the war will be over soon. The peace deal is always a day or hours away, according to certain media outlets.
It hasn't materialized, yet the idea that this could be over soon continues to set expectations about the impact of this war. Every time a news outlet announces that a memorandum of understanding is about to emerge to extend the ceasefire, we have a sell-off.
"The White House has been relentlessly focused on telling the market that the war will be over soon."
Helima Croft, Head of Global Commodity Strategy and MENA Research, RBC Capital Markets
How long will it take to restore supply once a deal is reached?
Croft: The Iranians are insisting that there is no deal that doesn't end with them in control of the Strait of Hormuz. That's why we've come to the view that after any reopening scenario, flows will be appreciably lower than before the start of the war.
As long as Iran is exercising operational control over the Strait, certain shipping companies and insurers, particularly Western ones, won't feel comfortable having to coordinate with or pay the Islamic Revolutionary Guard Corps. They're also going to be concerned about the risk of missile strikes.
Saudi Arabia is likely to continue to use the East-West pipeline and bypass the Strait of Hormuz as much as possible. The Emiratis are focused on building their second pipeline that runs straight to Fujairah. But none of those solutions is 100% risk-free.
When we recently interviewed the CEO of ADNOC, Dr Sultan Ahmed Al Jaber, he said it will take at least four months to get back to 80% of pre-war oil flow levels through the Strait. The war has to end before you can even start that clock.
That's something market participants might have focused on. Yet just after that interview, the market sold off, on the basis of another anonymous source saying a deal was imminent. It was a mirage: the deal never materialized.
"It will take at least four months to get back to 80% of pre-war oil flow levels through the Strait. The war has to end before you can even start that clock."
Helima Croft, Head of Global Commodity Strategy and MENA Research, RBC Capital Markets
What are the current prospects of an agreement?
Croft: I think the IRGC has come to the view that time is on their side. They are determining which few ships are getting through every day.
There are reports that they've used the ceasefire to replenish their drone stockpiles to rebuild missile capabilities and repair infrastructure. So, are they desperate to sign a deal? Probably not.
The most onerous economic sanctions on Iran have been imposed by the U.S. Congress, which stipulated a whole process of review to waive those measures. President Trump doesn't have unilateral authority just to vacate the sanctions: that was an issue the Biden administration encountered as well.
So the nuclear program and sanctions relief are going to remain very significant stumbling blocks. A lot of market participants don't want to get bogged down in these details, but they are really important.
