Oil Prices Rise Amidst Uncertainty Over US-Iran Deal and Strait of Hormuz Supply

New York. International market oil prices rose again on Tuesday as detailed information about the preliminary agreement to end the war between America and Iran was not clear and it appeared that oil supply from the world's major waterway, the Strait of Hormuz, would take longer than expected to resume. 

Due to this concern in the market, the price of Brent crude futures increased by 26 cents per barrel, or 0.3 percent, to $83.42. Similarly, the price of American West Texas Intermediate (WTI) also increased by 46 cents per barrel, or 0.3 percent, to $81.12.

Earlier on Monday, after US President Donald Trump stated that a memorandum of understanding had been signed to end the ongoing war between America and Israel with Iran, oil prices had fallen by a significant 5 percent, reaching their lowest point since March 4. Due to this war, the Strait of Hormuz was completely closed, through which one-fourth, or 20 percent, of the world's total oil supply was transported before the war began. Due to the conflict, about 14 million barrels of oil production per day was halted.

Although the announcement of the agreement initially brought enthusiasm to the market, investors have become skeptical because the full text of this memorandum of understanding has not been made public and a permanent peace agreement is yet to be finalized. According to preliminary indications, this agreement will reopen the blockaded Strait of Hormuz and extend the ceasefire for 60 days, giving facilitators time to discuss complex issues such as the future of Iran's nuclear program.

On Monday, Iranian President Masoud Pezeshkian also called the US-Iran memorandum of understanding an important step to stop the fighting, but clarified that a final agreement for lasting peace is yet to take shape.

According to Tim Waterer, chief market analyst at KCM Trade, the main challenge may lie in the internal terms of the agreement, and until those details are revealed, the energy market is likely to adopt a further wait-and-see approach for risk management. A senior Iranian official has pledged that Iran will halt its nuclear activities, not further enrich uranium, and not expand its nuclear facilities until a final agreement is reached. However, it is still unclear how quickly oil supply, halted due to the war, can return to the market even with this agreement.

Tony Sycamore, a market analyst at IG, said that the path to restoring the flow of oil supply to its previous state is not as easy as expected. He mentioned that it will take a considerable amount of time to remove mines or explosives laid in the maritime route, to re-establish full coverage of maritime insurance, and to make ships and their operators feel safe returning to the Gulf region.

Furthermore, his analysis suggests that oil supply will not return to its normal pace immediately, as it will also take time to bring the oil wells shut down due to the war and the damaged regional infrastructure back into operation.