What’s Next for Oil Markets After the Ceasefire Agreement?

The ceasefire announced by President Trump on April 7 implicitly acknowledges Iran’s newfound control over Gulf energy flows—a strategic challenge for oil market stability and the interests of Gulf Arab exporting countries. The United States has halted the military campaign it started six weeks ago with Tehran poised to call the shots on oil and gas exports. As was the case prior to the ceasefire, tanker vessels will require Iran’s approval to exit the Gulf, which may be conditioned on a new tolling fee arrangement. 

Following Trump’s announcement, Iranian Foreign Minister Abbas Araghchi stated: “For a period of two weeks, safe passage through the Strait of Hormuz will be possible via coordination with Iran’s Armed Forces and with due consideration of technical limitations.”

The first signposts to watch are the extent to which Iran grants tanker vessels permission to pass and whether ship operators are sufficiently confident of safe passage to resume normal activities. With Iran having reportedly re-closed the strait on Wednesday afternoon in response to alleged ceasefire violations by the United States and Israel, ship operators and the oil market writ large are left with more questions than answers.

Q1: What is the scale of Gulf oil export disruptions from which recovery is needed?

A1: According to Petro-Logistics, Gulf crude and condensate exports via Hormuz are down from 16.3 million barrels per day (mb/d) before the war to just 1.2 mb/d during the seven days ending April 6. Another 3.7 mb/d have been redirected by Saudi Arabia to Yanbu on the Red Sea and by the United Arab Emirates to Fujairah in the Gulf of Oman. 

With exports essentially halted for about a month, and no empty ships on hand to load new cargoes, Gulf producers were forced to slash production by more than 10 million barrels per day. Export recovery will require empty ships returning to load Gulf oil cargoes and restoration of normal oil output levels from producing countries. 

Q2: What is needed to begin the resumption of Gulf oil exports?

A2: Assuming Iranian permission to transit the Strait of Hormuz is broadly granted, and ship operators feel safe enough to resume seaborne movements (critically important assumptions, and by no means assured at time of publication), initial shipping operations will focus on clearing the enormous overhang of oil, totaling 116 million barrels (equal to about one week of prewar exports), that has been stuck on tankers inside the Gulf for the past month. Once those laden tankers have exited the region, empty tankers will be able to enter the Gulf to load new cargoes and restore oil production levels. This sequence assumes the export terminals, and the facilities that supply them with crude oil and refined products, are intact. 

Q3: How are oil prices responding to the ceasefire announcement?

A3: In the futures market, prices for international benchmark Brent crude oil had plunged about 13 percent to $95 per barrel by Wednesday morning. Futures prices for the top U.S. crude, called the West Texas Intermediate (WTI), had fallen by about 15 percent to $95 per barrel. Brent and WTI futures remained 30 percent and 40 percent higher, respectively, than their prewar levels. 

More importantly, those widely quoted futures prices do not tell the whole story. In the physical oil market, in which crude and refined products like gasoline, diesel, and jet aviation fuel change hands, prices have been much higher—around $140 per barrel for Brent-type crude. The price of jet fuel has surged to $4.88 per gallon, which translates to more than $200 per barrel. Looking forward, it is quite plausible that widely quoted futures prices will fall further while the physical market stays tighter for longer, postponing price relief at the pump and in airfares. We’ll address the unusual divergence between physical and “paper” oil markets in a forthcoming report.

Q4: How will the expected Iranian tolling fee affect oil markets?

A4: The unofficial reported price range of the expected new toll, $1–$2 per barrel, will marginally increase prices, but not enough to render Gulf supplies uncompetitive. It’s likely (and probably intended by Tehran) that Gulf Arab exporting countries will bear most or all of the added transportation cost as a form of compensation for (in Iran’s view) having facilitated the U.S. assault. Tehran could later decide to increase the toll to further pressure Gulf Arab producers, including possibly in future disputes related to basing rights or other elements of their relations with the United States. 

Iran’s Hormuz tolling leverage could also be applied in the context of future oil supply policy decisions by the Organization of the Petroleum Exporting Countries (OPEC).  Assuming oil sanctions relief is forthcoming, Tehran will want to reclaim market share lost in recent years to competitors. Iran can now use its newfound geopolitical influence to lean on Gulf OPEC nations to “make room” for Iran’s barrels to return to pre-sanctions destinations in India, Japan, Taiwan, Turkey, South Korea, Greece, and Italy. This could take the form of limiting Gulf OPEC export volumes or increasing the cost of those barrels via higher tolls—or both. 

It’s not a foregone conclusion that Gulf Arab exporters will even receive Iran’s permission to resume shipments with any toll arrangement. If it does, Tehran may charge those “hostile” nations a higher rate than the toll to be imposed on Iraq, seen by Tehran as an allied government. 

Clayton Seigle is a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies and holds the James R. Schlesinger Chair in Energy and Geopolitics.