Markets priced out the Iran war. Now they must price Hormuz politics

The US-Iran interim peace deal has not formally collapsed. But it has been overtaken by the very disputes it was supposed to manage, thrusting the oil market back into supply uncertainty less than three weeks after it had begun pricing a return to normality.

Washington’s July 7 revocation of the sanctions waiver covering Iranian oil and petrochemical exports, followed by its largest strikes on Iran since the June 17 Memorandum of Understanding was signed and the Iranian strikes on US military sites in Bahrain, Jordan and Kuwait over the weekend, has brought the conflict back to a familiar crossroads: renewed military escalation or another reluctant attempt at diplomacy.

Iran, which has been firing at vessels attempting to cross Hormuz through Oman’s territorial waters in a bid to assert its exclusive oversight of the waterway as it reopened to commercial traffic, had vowed a “crushing response” to the latest US strikes.

A framework for restoring stability

The latest turn of events should alarm markets but not surprise them.

The MoU was never a robust framework for restoring stability after more than three months of a conflict, during which a stubborn chasm between Washington and Tehran on key issues repeatedly frustrated diplomacy.

The final product was a poor attempt at rapprochement between two adversaries whose differences had not really been bridged. It was a vaguely worded 14-point document that was sufficient to pause the war, but not to dependably reopen the world’s most important oil chokepoint – a task that demands clarity, consistency and confidence.

The market’s belief that Hormuz was on a steady path back to normality proved both premature and misplaced. The latest events have merely confirmed what the agreement always implied: reopening the Strait would prove considerably harder than reopening diplomacy.

The seeds of the latest crisis were sown in Point 5 of the MoU, which governs the reopening of the Strait. It required Iran to “make arrangements using its best efforts for the safe passage of commercial vessels” and promised that Tehran would levy no charges for 60 days. But it failed to answer the most important question: who controls shipping through Hormuz during the interim period?

Centre of the new crisis

That omission has now become the centre of the crisis.

Two competing transit regimes have emerged. The US, Oman and the International Maritime Organisation (IMO) support a southern corridor adjoining Omani waters for commercial shipping. Iran insists that vessels should instead use a northern route through its territorial waters after obtaining clearance from the Persian Gulf Strait Authority. Washington rejects that position outright, arguing that Hormuz must revert to its pre-war regime of free navigation.

The international shipping, insurance and trading communities need a single, publicly understood set of rules. They need to know which lanes are safe, who is responsible for security, what legal regime applies and whether a transit will be treated as lawful by both sides. Instead, they were given rival interpretations of the same agreement.

Tehran’s interpretation of the MoU

Iran’s continued strikes on vessels using or approaching the US-backed Omani corridor signal that Tehran is attempting to establish facts on the water before any permanent governance regime is negotiated. Washington’s response — revoking the oil sanctions waiver and striking Iranian coastal sites — demonstrates with equal clarity that it is unwilling to accept Tehran’s interpretation of the MoU.

Whether the conflict escalates or diplomacy resumes, the market must now factor in a more complicated picture: the Strait may not be closed in the old sense, but nor will it be reliably open in the commercial sense.

Once all the stranded tankers have escaped and the prompt barrels have been absorbed, the market will face a new fundamental reality. If empty tankers remain reluctant to return, insurance stays prohibitively expensive and rival transit regimes persist, the Gulf export system may not fully normalise for many months to come.

Layer of uncertainty

The Treasury’s 10-day wind-down period for Iranian oil transactions adds another layer of uncertainty. Iranian crude was already facing cautious buyers unsure whether sanctions relief would survive beyond its initial 60-day window. That uncertainty has now been resolved in the most bearish way for Tehran and the most bullish way for crude.

Physical balances remain comfortable for now. But a prolonged disruption to Gulf exports would rapidly swing the market from abundance towards scarcity. Severely depleted commercial and strategic stockpiles around the world mean the protective buffers of the past four months are gone.

The next move belongs to Tehran. Markets will now focus on whether Iran attempts once again to choke off Hormuz or whether both sides, however reluctantly, return to diplomacy.

A clear definition of peace

If negotiations resume, the next agreement cannot simply stop the shooting. It must define the peace. That means a clear, unified and publicly communicated understanding of how Hormuz is to operate during the interim period — who governs transits, which corridors vessels should use, what role Oman and the IMO can play, when the international Traffic Separation Scheme channels are expected to be de-mined and reopened, and whether Iran has any recognised authority to clear or charge commercial shipping.

That would be only the first step towards repairing the MoU’s fault lines. More fundamental disputes — from Lebanon's security arrangements to Iran's nuclear programme — remain unresolved and will require far greater honesty, precision and political courage than the first attempt at rapprochement. Without that, any peace is likely to prove as fragile as the agreement that sought to deliver it.