On 17th April Seyed Abbas Araghchi, Iran’s foreign minister, declared that commercial passage through the Strait of Hormuz was “completely open”. Shortly afterwards Donald Trump, America’s president, echoed his words: the conduit was “completely open and ready for business”. Oil traders, relieved that 15-20% of the world’s oil, and almost as much of its liquefied natural gas (LNG), might at last be released to global markets, pushed futures prices for Brent, the global benchmark, down by more than 10%, to $89 a barrel, their lowest since March 10th. The spot price at the Dutch Title Transfer Facility, Europe’s gas-trading hub, fell below €40 ($47) per megawatt-hour for the first time since the conflict began.
Why Iran, having refused to reopen the strait when its ceasefire with America was announced on April 7th, is relenting now remains unclear. Perhaps its rulers want to show America they are serious about negotiations. Mr Araghchi’s comments came a day after Mr Trump announced a ceasefire in Lebanon, where Israel has been fighting the Iranian-backed militants of Hizbullah. Perhaps the regime was scared that the American blockade of the passage, which has prevented Iranian-linked ships from sailing through the strait since April 13th, would drain its finances. Mounting diplomatic pressure may also have played a part: in recent days countries, from Britain and Germany to China, have urged Iran to restore freedom of navigation.
How open the strait really is, and how long it stays that way, is even murkier than Iran’s motivations. Iran appears to have dropped its plans to charge a toll, which Mr Trump briefly entertained sharing with the Iranians before deeming it unacceptable. But Mr Araghchi has insisted that ships must follow “the co-ordinated route”. This was laid out in a map issued by the Islamic Revolutionary Guard Corps (IRGC), the regime’s elite fighting force, after last week’s ceasefire. It directs tankers via Iranian waters around the island of Larak.
A source familiar with Iran’s oil logistics says the long-established shipping lanes running through the centre of the strait, mostly in Omani waters, have been mined. Funnelling hundreds of tankers through a narrow passage could take weeks, even assuming all of them are allowed through. An hour after announcing the opening, Mr Trump declared that “Iran has removed, or is removing, all sea mines.” Even if Mr Trump is to be believed—and he has not always been a reliable witness during the war—it will take a brave shipowner to chart a course through them.
The deal’s durability is also in question. In his tweet Mr Araghchi said that sailings would be allowed “for the remaining duration of the [Lebanese] ceasefire”, which expires in nine days. This makes for a short window in which to attempt the passage, especially since many shipowners would want to see a few days of calm before sailing on. Tensions could easily flare up again, for instance if Mr Trump does not lift the American blockade, which he says will remain in place for now.
None of this amounts to true freedom of navigation. Traffic through Hormuz will thus probably remain limited, at least at first. Kpler, a ship-tracker, has so far spotted three LNG tankers moving near the strait to pick up supplies in the United Arab Emirates, hardly an armada. “There are too many unknowns,” says Matt Wright of Kpler.
The resulting caution will prolong the energy crisis. Even if the ceasefire holds and ships start moving through the strait more or less normally, it will take months to resolve.That is because for markets to normalise, three things must happen in sequence: Gulf production must recover; ships must return; and refiners must process crude into usable fuel. Each will take weeks.
Take production first. Unable to export and to store more unsold product, most Gulf countries have been forced to cut crude collective output by more than 10m barrels per day (b/d). If they can start exporting again soon, the damage to their wells will be limited. But it will still take two to four weeks to bring production back to pre-war levels. Restarting Ras Laffan, a gas liquefaction facility in Qatar that usually supplies 17% of the world’s LNG and was hit early in the war, will take longer still. Two of its 14 liquefaction units were hit by missiles, knocking out roughly 17% of Ras Laffan’s capacity—equivalent to about 3% of global supply. Other units require smaller repairs. Once these are complete, the complex facility will need six or seven weeks to become fully operational again.
Oil and LNG will also need to be loaded onto empty tankers returning to the Gulf. Persuading shipowners to come back may prove even harder than convincing those stuck in the strait to undertake the uncertain journey out. Insurance may remain elusive, or unaffordable, for months. “Mines are an insurer’s nightmare,” says the shipping expert. Many tankers that once served Gulf routes have found safer business elsewhere, so enticing them back will require generous freight rates. Some will opt to finish their current voyages, often picking up crude in the Americas and delivering it to Asia—a round trip that could take up to 90 days, says Andrew Wilson of BSR, a ship-broker.
Once crude reaches its destination, it must be processed. Here, too, there are stumbling-blocks. Asian refiners have dialled down activity for want of raw materials. Sumit Ritolia of Kpler reckons their collective throughput will end up 4.2m b/d lower in April than in February—a cut of nearly 15%. Crude shortages may persist for weeks given lags in Gulf output and shipping. In that scenario, predicts Neil Crosby of Sparta Commodities, a data firm, refinery runs could fall by a further 1.5m-2m b/d next month. Restoring throughput once supplies arrive will take several more weeks.
This will keep prices high and depress demand. Despite its sharp slide, Brent is 30% pricier than it was on the eve of the war, and 60% dearer than analysts’ forecasts in January for later this year. James Fernandes and Francis Osborne of Argus Media, a price-reporting agency, reckon high fuel prices and government-imposed rationing are already on track to destroy nearly 5m b/d of demand in April compared with February, most of it in Asia.
Elsewhere, too, stocks are being depleted. Much of the supply crunch has so far been absorbed by the near-record volume of oil already at sea before the crisis struck. After seven weeks of war and elevated prices those loitering tankers have mostly delivered their cargoes somewhere. As a result, land inventories are starting to shrink—and will continue to do so for weeks, particularly in Europe, where government subsidies are shoring up consumption. The reopening of Hormuz is a welcome first step. But energy markets’ route to normality will be uncertain, arduous—and long.