The U.S.-Iran peace deal is crisis management, not resolution. Oil’s fall could be temporary

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The wisdom of crowds is often a safe bet. Since Monday, the crowds have been betting that the tentative U.S.-Iran peace agreement will stick, allowing hundreds of trapped oil tankers on the wrong side of the Strait of Hormuz to make their merry way to refineries around the world.

Oil prices duly plummeted and anyone who had sold the commodity short made fortunes. The price continued to fall on Tuesday, with Brent crude, the international benchmark, struggling to stay above US$80 a barrel. Only a month ago, Brent was trading north of US$110. The current price is only about US$10 above the level immediately before the U.S. and Israel began bombing Iran on Feb. 28.

Calamity averted? Possibly, but possibly not.

For sure, both the U.S. and Iran are highly motivated to end a war that Iran did not start. With no navy, air force and air defences to speak of, Iran was at the mercy of relentless U.S. and Israeli bombing and cannot absorb more mass attacks. At the same time, Iran’s closing of Hormuz, through which 20 per cent of the world’s oil passed, and the U.S. blockade of Iranian ports starved Tehran of its main source of budget funding.

For its part, the U.S., primarily for economic reasons, wanted Hormuz reopened. The trapped oil had sent gasoline and diesel prices to near record levels in the U.S., putting drivers – that is, voters – in foul moods. U.S. President Donald Trump knew that high pump prices could destroy the Republicans’ chances of retaining control of the Senate and the House of Representatives in the November midterm elections. While the Republicans could still lose, the now-falling prices make their eradication somewhat less likely.

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The flaw in the argument is that the peace deal is no deal whatsoever. It is a temporary truce, not a permanent settlement; it is crisis management, not crisis resolution. A lot could go right, but a lot could go wrong. The framework agreement is to be signed in Geneva by U.S. and Iranian officials on Friday, after which the two sides have 60 days to resolve a few key issues.

Until a final agreement is reached, the truce by definition will be fragile, as was the one announced on April 8. If no final agreement is reached, the peace attempt could fall apart, sending energy prices back up, stoking inflation and possibly inducing central bankers to ramp up interest rates, as the European Central Bank and the Bank of Japan have done already.

Iran’s nuclear enrichment program is at the centre of the peace effort’s risk curve.

Left undecided so far is Iran’s right – or lack thereof – to enrich uranium. The U.S. will insist on a moratorium, perhaps an outright ban, on enrichment. It will also demand the disposal of Iran’s enriched uranium stockpiles either inside the country, under the supervision of the International Atomic Energy Agency, or outside the country by a third party.

The Iranians have been at the enrichment negotiating table with the U.S. before and the outcome was disastrous. The two sides met in Geneva in late February and the media reports said they were making progress. The unprovoked U.S. and Israeli attacks put an abrupt end to the talks.

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The point being, Iran does not trust the U.S. and is bound to be a tougher negotiator this time around. Hormuz is its effective arsenal. If Iran loses patience, it could retaliate by shutting the narrow strait once again, reversing the oil price fall. “There’s no question that America’s position is weaker now than at the beginning of the conflict,” Democratic Senator Jeanne Shaheen, of New Hampshire, said on Monday. “That’s particularly true because of Iran’s new willingness to close the Strait of Hormuz and hold the global economy hostage.”

Israel is another wildcard in the negotiations. It was not party to the tentative U.S.-Iran peace deal and has made it clear that it has no intention of being bound by it even though Mr. Trump has told Israel to stop attacking Iran-backed Hezbollah guerrillas in Lebanon. More than 3,700 people have died in Lebanon since the Israeli strikes began, according to the Lebanese health authority. Iran has made a permanent ceasefire in Lebanon a central part of its negotiating strategy.

But Israeli Prime Minister Benjamin Netanyahu and his cabinet ministers have ruled out withdrawing Israeli forces from southern Lebanon (or Gaza or Syria). As long as the Israelis remain in Lebanon, Hezbollah will treat them as an occupying army and fight back, triggering retaliation. “We established deep security zones around the state of Israel,” Mr. Netanyahu said on Monday. “We will remain in these security zones.”

Renewed fighting in Lebanon, an Israeli attack on Iran or failure on Iran’s uranium enrichment terms could scupper Mr. Trump’s peace agreement. There is still a long way to go on this file and control of Hormuz gives Iran the upper hand. In this case, it’s quite possible that the crowds’ “wisdom” is overly optimistic. Oil’s fall to prewar levels is far from assured.