Hormuz Reopens: Oil Slides as Ceasefire Holds, but the Bill Is Already In

The world's most important waterway is open again, and the oil market has exhaled. Brent crude fell to about 72.24 dollars a barrel on Thursday, below its closing price on the eve of the war, while West Texas Intermediate slipped to about 69.38 dollars, after the United States and Iran formalised a ceasefire and began unwinding a conflict that had choked off a fifth of global supply.

The turning point came on Wednesday, when the two sides signed a 14 point memorandum of understanding after two months of stalled talks. The agreement formalises the ceasefire, ends the American naval blockade of the strait and commits Iran to reopening it, with a 60 day window for formal negotiations that have been convened in Lucerne. On Thursday, US Central Command confirmed that restrictions had been lifted, and Iran committed to restoring commercial transit to pre-war volumes.

For traders who have spent almost four months pricing catastrophe, the speed of the reversal was striking. Oil that climbed above 100 dollars a barrel in the first week of the war is now cheaper than it was before a single shot was fired. Share prices in London and across Europe rallied, led by the airlines, hauliers and manufacturers whose costs rise and fall with the price of fuel, while sterling firmed against the dollar.

A backlog measured in weeks

Reopening a strait is not like reopening a road. Vessel movements doubled within 24 hours of the announcement, and 31 tankers left the Gulf in a single day. But more than 250 oil tankers and 440 cargo ships remain stranded inside the strait, and before the war between 100 and 135 ships transited daily. Clearing the backlog safely will take weeks of careful sequencing, and shipowners will need convincing on insurance and security before normal service resumes.

Nor is the politics entirely settled. Iran's Revolutionary Guard has since declared that only its own designated route through the strait is acceptable, calling the alternative route proposed under the International Maritime Organization and Oman "unacceptable and completely dangerous". Shipping companies will read that statement closely before committing hulls, cargoes and crews.

Why the bill is already in

The relief on the markets is real, but economists were quick to caution that the inflationary damage is already working its way through the British economy. Fuel bought at war prices is still being delivered and burned. Freight and insurance surcharges imposed during the closure are baked into contracts that run for months. The observation windows that feed the energy price cap have been recording elevated wholesale costs since March.

The past four months have left their mark. Pump prices climbed steeply through the spring, business groups reported surging fuel and freight costs, and households that had only just stopped thinking about energy bills found themselves thinking about little else. The inflation data for the summer, due over the coming weeks, will provide the first full measure of the damage.

In other words, oil can fall below its pre-war level while the price of everything it touches keeps rising. For the Bank of England, the episode complicates an already delicate judgement on interest rates. For households, it means the war's legacy will be visible in bills, pump prices and the cost of the weekly shop long after the last tanker clears the strait.

The Lucerne talks now carry the weight. A durable settlement would allow insurance rates to normalise and the stranded fleet to disperse; a collapse would send crude back above 100 dollars within days. Thursday's prices say traders believe the ceasefire will hold. The past four months suggest that belief should be held lightly.