After the Iran deal — all good again?

Oil prices are falling but will remain well above pre-war levels for a long time

Market participants have reacted very positively to the framework agreement between the U.S. and Iran. The price of a barrel of Brent crude has recently fallen to just under $80. In fact, according to the text of the agreement circulating in the media, Trump appears to have made significant concessions to Iran. For instance, Iran is set to receive at least $300 billion through a planned private “Reconstruction and Development Fund.” Furthermore, the U.S. intends to lift all sanctions against Iran once a final agreement is reached. Apparently, Trump wants peace at any cost to improve his party’s chances in the U.S. midterm elections. Given these concessions by the U.S., the Iranian regime would have much to lose if the conflict were to continue, which argues against a resurgence of the war and a renewed closure of the Strait of Hormuz. We therefore no longer expect an average oil price of $100, but rather $85, for our two-month transition scenario (through the end of July). We have lowered our year-end forecast from $85 to $80.

But we must not become overconfident; it will likely take until the middle of next year for the oil price to return to its pre-war level of just under $70:

• Slow Resumption of Production: With the reopening of the Strait of Hormuz, more ships will once again pass through the strait. However, it is likely to take quite some time before shipping traffic – and thus oil exports from the Gulf region – return to their pre-war levels. For example, the complete clearance of sea mines could take several months. Only then are insurers likely to be willing to insure ship passages under acceptable terms. According to estimates by the International Energy Agency (IEA), it could take another two to three months after the clearance for logistics to run smoothly again and for export volumes to normalize.
• Restocking: So-called commercial inventories (mostly at refineries) are likely to continue falling in the coming months, albeit not quite as sharply as the EIA had recently expected (Chart 1). Afterward, the depleted inventories will need to be replenished. This will increase demand for oil, especially since the countries most severely affected by the supply disruption are likely to aim for higher inventory levels in the future.
• Spare capacity barely utilized: Not all countries with spare capacity will or can utilize it to increase production. For example, the U.S. is likely to reimpose sanctions on the Russian oil sector as soon as the situation in the Gulf has eased. Furthermore, Saudi Arabia, which has the highest spare capacity, has an interest in a high oil price to stabilize its national budget.

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