Theme of the Day: The US and Iran agreed to a temporary two-week ceasefire

The US and Iran agreed to a two-week ceasefire in exchange for Tehran reopening the Strait of Hormuz. Trump said the US will help ease traffic through the waterway, with more than 800 vessels still trapped in the Persian Gulf. Pakistan’s pivotal role as mediator was hailed as a diplomatic coup, but the conflict risks leaving the US looking weakened in the eyes of its adversaries and more attacks in the region were reported. Markets greeted the truce with jubilation: Oil posted its biggest drop in almost six years, and gas prices plunged, while global equities surged as big funds piled into Treasuries and AI stocks, and gold rallied. But a protracted recovery for risk assets is still in the uncomfortable position of relying on the leaders in Tehran. Trump’s ceasefire with Iran has brought relief to global markets, but it leaves core disputes unresolved. Questions over shipping through the Hormuz waterway and Iran’s nuclear and missile programs continue to cloud the path to a lasting deal. The ceasefire. It's a pause, a welcome step back from the abyss. But ignore the predictable spin from both sides: it's too early to predict what will happen next. Uncertainties remain over what constitutes temporary “safe passage” across the Strait of Hormuz and the upcoming negotiations between the US and Iran. There remains substantial damage to energy infrastructure across the Middle East and more importantly substantial disruption in physical energy markets and distillates. In terms of the shipping logistics of the 2-week ceasefire, it remains uncertain how many tankers and ships will be able to take advantage of this crucial window. There is a significant backlog with hundreds of oil tankers stuck on both sides of the Strait of Hormuz and various energy loading infrastructure have been damaged. For now, risk remains that Brent crude oil will continue to oscillate around the headline $100/bbl level, albeit with elevated volatility, responding to fast moving news flow and headlines. Amidst all the above-mentioned uncertainties and the extreme whipsaw in crude oil futures over the past few hours, the 30-day volatility of Brent has jumped above 100%. Current extreme level of Brent volatility is now above the high seen in Q122 during Russia’s invasion of Ukraine, but still lower than the record level witnessed during the collapse in energy prices during the onset of Covid in Q120. In addition, a fair amount of oil tankers had been diverted to Saudi Arabia’s alternative shipping port Yanbu on the Red Sea, on the opposite side of the Arabian Peninsula, so these ships are unlikely to be able to sail back up the Strait of Hormuz on time. Furthermore, it is uncertain if the oil tankers will be able to secure the crucial shipping insurance as well to make passage, costs of which have been repriced significantly higher. The negotiations in Islamabad will be complicated, to say the least, given the enormous gap between America and Iran. President Trump has confirmed receipt of Iran’s 10-point proposal and was quoted as saying that it is “a workable basis to which to negotiate”. However, much uncertainty remains as to what are the details and how the negotiations between US and Iran will now progress. Various unconfirmed news reports suggest that Iran’s 10-point proposal included various challenging terms like lifting of sanctions, right to continue nuclear enrichment, war compensation and an administrative framework for Iran to collect “toll charges” for shipping through the Strait of Hormuz etc. Full details of the 10-point proposal were not made public. If the talks fail, a renewed war is possible. But the war is deeply unpopular in America; Donald Trump is keen to have it done before he meets Xi Jinping next month; and the energy shock would likely be even greater next time. All of that is a constraint on Trump's ability to start another round. The other option is that we go back to a version of the pre-war status quo: a battered Iran still under sanctions and the threat of further attack, sitting on a stockpile of 400kg of highly-enriched uranium.