Oil & Energy
Hormuz Reopening Could Ease Crude Risk Premium, But Risks Remain, Rystad Energy Says
A reopening of the Strait of Hormuz under the proposed US-Iran peace agreement could help unwind the geopolitical risk premium embedded in crude prices, although oil markets are unlikely to normalize immediately, according to a note from Rystad Energy on Monday.Production will take time to ramp up, logistics will need to normalize, and geopolitical risks linger, Rystad said.Over the weekend, the US and Iran announced a peace agreement, with a formal signing to be held in Switzerland on Friday.The proposed deal is critical for energy markets and includes the toll-free reopening of the Strait of Hormuz and the removal of the US naval blockade.Rystad analysts, however, urged caution until the agreement is formally signed.Lebanon is still a "persistent flashpoint," analysts said, with "potential sequencing disputes" between the US and Iran likely to slow implementation.Additionally, Iran's nuclear pledges have been pushed into a 60-day negotiating period, highlighting that key details remain unresolved."Still, the structural constraints that have repeatedly derailed earlier de-escalation efforts appear, at least for now, to be temporarily aligned," according to the note.Claudio Galimberti, chief economist at Rystad Energy, said that if the deal holds, it will be "the most workable outcome" for all parties."Washington has an incentive to avoid a spike in gasoline prices ahead of the midterms, while Tehran is seeking sanctions relief and restored export revenues, and the global economy has a strong interest in keeping the Strait of Hormuz open," Galimberti said.Galimberti said the rare alignment of incentives across all parties suggested the agreement could prove more durable than previous diplomatic efforts."That said, a signed agreement is not a functioning one, and the sequencing dispute, with both sides insisting the other must move first, remains the main fault line, while Lebanon continues to represent a wildcard that neither Washington nor Tehran fully controls," Galimberti said.He noted that the markets have witnessed this before, with the initial headline rally followed by a fade as implementation risks resurfaced, with "little to suggest that pattern has been broken."Galimberti said a credible reopening of the Strait of Hormuz would be one of the most important developments for the global economy, particularly at a time when the European Central Bank is still tightening policy in response to an energy shock."In that context, every barrel previously constrained through the Strait represents inflationary pressure that would begin to unwind, at least at the margin," Galimberti said.Rystad cautioned that a return to normal market conditions immediately following the signing would be optimistic.While market sentiment has improved, reflected in Friday's close, Galimberti said sentiment should not be confused with a recovery in physical supply.He added that production would take time to ramp up, logistics would need to normalize, and the geopolitical risk premium embedded in crude prices would likely take longer to dissipate.Rystad noted that broader structural changes in the market, including the UAE's departure from OPEC+, would continue to influence supply dynamics, meaning that even a successful deal should be viewed as an important step toward stability rather than a complete resolution of market uncertainties."If the deal holds, it will therefore represent a step in the right direction, and an important one at that, but still a step rather than a destination," Galimberti said.
