US-Iran Deal Reopens Hormuz Strait but Risks Remain for Oil Markets

The U.S. and Iran have agreed to end months of conflict and reopen the Strait of Hormuz, a critical waterway for global oil and LNG shipments. The deal, set to be formally signed on Friday, will lift blockades on the strait, which handles roughly a fifth of global oil and LNG. However, the agreement leaves key disputes unresolved, including Iran's nuclear program, raising concerns about future tensions.

The reopening of Hormuz will provide relief to energy markets, with around 60 million barrels of crude and refined products currently held in floating storage set to be released. This could bring back roughly 11 million barrels per day of oil output that was shut in during the conflict. However, the resumption of shipments will not translate into instant relief, as supply chains could take 60 to 90 days to rebalance fully.

Despite the deal, the risk of renewed confrontation remains high. Iran's willingness to choke off the strait in the past has shattered a decades-old taboo, and the country may use this as leverage in future disputes. This uncertainty is likely to keep a higher geopolitical risk premium in oil prices, preventing a full return to pre-war levels in the $60s.

The reopening comes at a challenging time for the supply-demand balance, with summer in the Northern Hemisphere marking the peak in global fuel consumption. While the deal offers some relief, it does little to reduce the risk of renewed confrontation, leaving structural vulnerabilities in the oil markets.