Displaced people transport their belongings in cars as they make their way back to their homes Monday following a peace deal between the U.S. and Iran, in southern Lebanon.Aziz Taher/Reuters
The U.S. and Iran reached a framework agreement to extend their ceasefire, reopen the Strait of Hormuz and end the U.S. Navy’s blockade of Iranian ports. The halt to hostilities sent oil prices down sharply and lifted stock markets and bond prices.
While the war’s halt may only be temporary – some crucial issues were left open – investors and energy traders clearly took the view that the truce marks a turning point after three months of on-off negotiations.
In early afternoon trading in London, Brent crude, the international benchmark, was down 5 per cent to about US$83 a barrel, extending a slide that began in mid-May, when the price was above US$110. Japan’s Nikkei 225 stock index rose more than 5 per cent on Monday, reaching a record high.
U.S. and Iranian officials said they had agreed on a framework to end their war, halt the U.S. blockade of Iran and reopen the Strait of Hormuz.
Reuters
Japanese investors were reacting to the success of the blockbuster SpaceX initial public offering as well as the prospect of renewed flows of oil through Hormuz to Asian economies, which are highly dependent on energy from Iran, the United Arab Emirates and other Persian Gulf countries.
The main European indexes rose in afternoon trading. Germany’s DAX gained 1.3 per cent and the FTSE-100 was up marginally. On Wall Street, S&P 500 futures gained 1.3 per cent.
Shippers remain cautious on Strait of Hormuz, despite tentative U.S.-Iran peace deal
Hormuz, through which 20 per cent of the world’s oil and gas normally pass, has been largely closed since the U.S. and Israel began their attacks on Iran on Feb. 28. According to data intelligence firm Kpler, almost 600 ships, most of them oil and LNG carriers, are stuck in the Gulf, unable to pass through Hormuz for fear of Iranian missile attacks, hitting sea mines or because of costly war-insurance premiums. Many unloaded ships wait on the other side of the narrow strait.
Officials from the U.S. and Iran will meet in Switzerland on Friday to sign the interim agreement formally. Neither country released a text of the truce, suggesting that peace talks were still fluid.
The broad outline of deal was confirmed by Pakistan and Qatar, which have been leading the peace negotiations. No details were given.
Opinion: Two wrongs don’t make a right in the Iran war
The U.S.-Iran agreement is still in flux and, so far, does not guarantee that Hormuz will open permanently or, if it does, that it will be toll free. In a call to The New York Times on Sunday, his 80th birthday, President Donald Trump said the U.S.-Iran deal would make passage through Hormuz “permanently toll free.”
But Iranian state media Mehr said the agreement to be signed in Geneva stipulates that Hormuz’s reopening will be carried out under “Iranian arrangements.” Iran has been charging tolls up to US$2-million per vessel for “safe passage” through the strait.
Other issues remained open, primarily the fate of Iran’s nuclear program, whether the U.S. will agree to unfreeze tens of billions of dollars of Iranian funds held outside the country and a permanent ceasefire in Lebanon. The fighting between Iran-backed Hezbollah guerrillas and Israel has seen large swathes of south Beirut, which Israel considers a Hezbollah stronghold, and the region immediately north of the Israeli border reduced to rubble.
Displaced people in the southern port city of Sidon, Lebanon, prepare to return to their village on Monday, following the announcement of an initial ceasefire agreement between the United States and Iran.Mohammed Zaatari/The Associated Press
Iran’s deputy foreign minister, Kazem Gharibabadi, said on Iranian TV that an “immediate end” of the war had been declared on all fronts, Lebanon included. Earlier, Mr. Trump warned Israel that there should be no more attacks “anywhere in Lebanon.” But Israeli Defence Minister Israel Katz told the Haaretz newspaper that Israeli forces “will remain in the security zones in Lebanon, Syria and Gaza indefinitely.”
Iran’s nuclear-enrichment program was left open, pending negotiations over the next 60 days. Mr. Trump said that if the U.S. and Iran fail to reach an accord on the disposal of the uranium, the U.S. would restart attacks on Iran and make the U.S. “the guardian of the Middle East” in return for 20 per cent the region’s revenues.
The U.S. reportedly will grant Iran a waiver to sell its oil during the 60-day period. Oil and gas exports are the lifeblood of the Iranian economy and typically generate 60 per cent of government revenues.
Clearing mines from Strait of Hormuz could take weeks, sources say
While oil prices are well off their year’s peak, they are still up 10 per cent over the past 12 months. Before the war started, Brent crude was trading at less than US$70. Some economists think the fall in prices will do little in the short term to ease inflationary pressures.
“Financial markets are once again excited about a potential Middle East peace deal and the possible resumption of energy flows out of the Gulf,” ING Economics said in a note published Monday. “Whether that delivers much lower energy prices is highly questionable. What is clear, however, is that the inflation genie is out of the bottle and very few central banks can look through this inflation shock.”
Oil hits 3-month low as U.S., Iran reach peace deal to reopen Strait of Hormuz
ING said investors expect the U.S. Federal Reserve to hike interest rates since annual inflation is trending above 4 per cent. Last week, the European Central Bank raised rates by a quarter of a percentage point.
Neil Shearing, group chief economist at Capital Economics, said that the tentative peace deal “will not prevent inflation from rising a bit further in the near term” but will “reduce the immediate pressure on central banks to raise interest rates.”