Energy Markets’ False Dawn May Be Over

The inevitable question is: What comes next? The answer is that nobody knows. 

The entire reason that the Trump administration signed the memorandum of understanding (MOU) with Iran was to open the Strait of Hormuz, a vital conduit for shipping, and to end the bombing campaigns that did little to alter Tehran’s strategic calculus. Three weeks later, the cease-fire is apparently “over,” according to Trump; key parts of the MOU have collapsed; oil prices are rising again; and the Iranian regime seems more intransigent than before. 

“Everyone expected at some point that the MOU would be tested. I think that time has come sooner than expected,” said Ellie Geranmayeh, a senior policy fellow and the deputy head of the Middle East and North Africa program at the European Council on Foreign Relations.

What set this all off was that Iran attacked several ships transiting the Strait of Hormuz earlier this week because they were using a route that skirts the Omani coast and is not under the purview and control of the Iranian regime. On Tuesday, Trump fired back at Iran with a wave of airstrikes on radar installations, air defense sites, and other targets. (He also suggested on Wednesday that there may be further strikes to come.) None of that squares with the spirit or the letter of the MOU, which starts off with a pledge by both countries to refrain from hostilities.

“I think it’s over,” Trump said of the cease-fire with Iran, speaking at the NATO summit in Turkey on Wednesday. “I don’t want to deal with them any more. … They’re sick people. They’re led by sick people, and they’re vicious, violent people. And if they had a nuclear weapon, they’d use it. As far as I’m concerned, it’s over.”

What’s not over, despite a false dawn over the past three weeks, is the drama for the oil industry and the broader global economy. As the United States unleashed airstrikes, it also loosed an economic salvo on Iran, rescinding the temporary waivers on sanctions that Trump had granted to Iranian oil exports as part of the MOU. 

That may not make much difference in real terms, because most buyers were still treating Iranian oil with a 10-foot pole, and those that do buy the stuff (China) will continue to do so with or without Washington’s permission. Whatever discount Iran suffers from its return to illicit oil sales will be compensated by higher global benchmark oil prices. Brent crude jumped Wednesday to nearly $80 a barrel, after weeks of flirting with the high $60s.

Iran took advantage of the end of the U.S. blockade to ship oil to buyers in Asia. Estimates vary, but in the three weeks since the MOU, Iran seems to have exported about 60 million barrels of oil, a $4 billion fillip ahead of the promised release of impounded Iranian funds that was also part of the MOU.

What would make a difference is the reimposition of the U.S. blockade on Iran, a notion that Trump floated on Wednesday at a press conference in Turkey. That would blow up whatever remains of the fragile peace deal, but it might be the only lever that Washington has to regain the upper hand in a fight it lost weeks ago.

“The Strait of Hormuz was meant to be Trump’s real achievement, but it is no longer. If the U.S. goes ahead with reimposing its blockade, we are back to the ‘cease-fire’ that lasted from April to June,” Geranmayeh said.

The return of fighting to the region, after a few weeks of relative peace, is a cold shower for oil producers who are trying to unload stored oil on previously trapped tankers and figuring out how quickly to restart production at fields that were idled during the war. Oil bears may have to hibernate this summer.

But the breakdown of the cease-fire does speak to a wider misunderstanding between Washington and Tehran on what has become the biggest single issue, overshadowing even the nuclear portfolio: What happens to Hormuz? According to the MOU, which Trump personally signed, Iran is in charge of organizing shipping in the strait during the period of bilateral talks, and after that, it will have a say in creating a new shipping regime that may include some sort of toll, fee, or charge otherwise to allow vessels to leave the Persian Gulf cul-de-sac. 

Iran is adamant that it will not give up the leverage that it has over the vital shipping lane. Iranian Parliamentary Speaker Mohammad Ghalibaf said on Wednesday that the United States violated the MOU by not abiding by Tehran’s rules of the road for shipping. 

“Seen from the Iranian side, Hormuz is now as important as the right to enrich,” Geranmayeh said. “They know that U.S. policy can change at any time, but geography never does.”

The United States, despite signing off on Iranian control of the strait, does not see it that way and has continued to shepherd vessels through alternative routes, sometimes under the protection of the U.S. Navy. That is one reason why Hormuz shipping traffic recovered from near-zero to more than one-third of its prewar levels in recent weeks. The unpause on the war hasn’t paralyzed traffic yet, but it could, at a time when global oil inventories remain stretched.

But if the war that began in late February and was halted in June is not actually over, where does that leave the Trump administration’s plans to deal with Iran, its nuclear program, its support for terrorist proxies, and its newfound leverage over the Strait of Hormuz? U.S. Secretary of Defense Pete Hegseth and Vice President J.D. Vance both promised that Trump’s war with Iran would not be a “forever war,” though it is starting to feel that way. 

Trump “is like a mouse that ran over a glue trap,” said Richard Nephew, a sanctions expert at Columbia University and a former U.S. government official. “Nobody can win by fighting, but they both think they won. This is a story where we are still in the first act.”