Strait Talk

Initial news reports following the announcement in mid-June that the Strait of Hormuz would reopen made it seem that the oil markets would rapidly return to normal. And financial markets reacted as if that were the case. After peaking at nearly $120 a barrel in April, Brent oil prices dropped to $77 per barrel on June 18, within $5 of their pre-war levels.

But there is a big difference between how financial markets react and the actual conditions, according to Transportation Energy Institute Executive Director John Eichberger. “It will be spun as if we have opened up the gates of heaven and everything will go back to normal,” Eichberger said. “That is not how oil flows out of the Persian Gulf.”

Even if the elements related to the peace plan hold, that doesn’t mean that traffic going through the strait will immediately return to normal.

A Slow Restart, Not a Flood

Roughly 20% of the world’s oil supply goes through the Strait of Hormuz, making it one of the most important transit routes in the global economy. Even though news reports have made it seem tankers are lining up ready to go, that’s not the case.

“One of the big challenges is that carriers are going to wait for their insurers,” said Eichberger. “Insurance companies are extremely risk averse.”

The largest oil supertankers, known as Very Large Crude Carriers (VLCCs), can hold 2 million barrels of oil. Multiply that by $75 per barrel—not to mention security concerns for the crew and the cost of the ship—and it becomes obvious why insurers would want a high degree of certainty that it is safe to pass through the strait.

The long-term end of hostilities is only one of many concerns. The strait will also need to be cleared of mines that could damage ships.

Once it’s safe, there are logistical realities. VLCCs travel slowly—topping out at about 15 miles per hour, about the speed of a leisurely bike ride. The journey from the Strait of Hormuz to Houston is approximately 11,000 miles, meaning that it could take up to six weeks for oil to arrive at U.S. refineries. “It takes weeks for oil to move across the world,” Eichberger said. “A lot of those ships have been dislocated. … It’s going to take them a long time to get back in the queue.”

With redeployment delays and long transit times, including time for empty VLCCs to move into the strait to pick up fuel, the supply chain reset will take months. Eichberger said that most industry experts estimate it will take 12 to 18 months before markets resemble anything close to pre-disruption conditions—if they ever do.

Markets Driven by Expectation

So why have oil prices dropped when actual market conditions are still so uncertain? To an extent, the reason is similar to 2008, when oil prices shot up to $140 a barrel and gas prices topped $4 for the first time, despite no major supply disruptions: speculation.

“The markets are very focused on what we think is going to happen, not what has happened,” Eichberger said.

That dynamic has led to volatile swings driven by headlines rather than fundamentals. “The futures markets continue to react to news,” he said. “And let’s be honest, the news has not been consistent. So, it’s been a very jagged market.”

While the news of the strait reopening pushed down prices, market realities will shape what follows. “If the strait opens and supplies don’t start to recover, the investors are going to have a very different calculation,” Eichberger said. “Their focus will shift to what’s happening in Cushing [the city in Oklahoma that houses massive oil tank farms]. How many days of supply are in storage?”

“Cushing is a critical hub, but also what about terminals at refineries—are they full of crude? What about refined product at terminals throughout the country?” he asked.

Supplies Will Remain Tight

Even prior to the signing of the peace agreement, gas prices had been falling, from a high of over $4.50 in May to under $4 the day after it was signed. But that doesn’t necessarily mean that prices would continue to fall to the pre-war price point of around $2.80.

Because it will take months for actual barrels to arrive, be refined and distributed, there is a significant lag between market sentiment and market reality. “It is highly unlikely that we’re going to see a lot of relief at the pump over the next several months,” Eichberger said.

Meanwhile, global supply remains constrained. Strategic reserves have been drawn down, and key regions—including Europe and parts of Asia—are facing acute shortages.

Diesel: The Hidden Inflation Driver

While gasoline prices dominate consumer attention, Eichberger pointed to diesel as a more important indicator of economic health—and concern.

“Everything we buy is delivered by a truck,” he said. “A vast majority of trucks—close to 76%—run on diesel.”

Rising diesel prices ripple through the economy, increasing costs for agriculture, manufacturing and retail—not to mention adding a few cents per gallon to the cost of transporting gasoline to fueling stations.

“That doesn’t just affect the people buying the fuel,” he explained. “It affects all their customers and all their customers’ customers.”

This compounding effect could influence inflation in the months ahead, particularly if supply constraints persist.

Big-Picture Changes

Beyond immediate market impacts, the disruption has sparked broader questions about energy security and strategy. Countries are now reassessing how they source, store and consume energy.

Even if the agreement holds, the experience has exposed vulnerabilities that will shape future policy. Some countries may expand reserves, while others will accelerate efforts to reduce dependence on oil altogether.

“There’s a huge amount of opportunity behind every change,” Eichberger said. “The question is how we take advantage of it.”

“I think Europe is going to double down on electrification,” he said. “China is doing the same thing.”

Alternative supply routes and technologies are also gaining traction. “You’re starting to see people look at alternatives,” Eichberger noted, pointing to new pipelines, rail transport and shifts in production. Rather than a single solution, he expects a diversified response. “Countries will try to refill their reserves, but they also want to quell demand and change the demand platform.”

What To Watch For

With so much uncertainty related to the agreement and how it will be embraced, not to mention all the physical uncertainties related to supply and distribution, it’s important to pay attention to four broad areas in looking at a return to stability—and recovery.

• International support: “Who’s backing this? Who is committed to supporting it?” Eichberger asked.
• Insurance activity: “When do [companies] start giving a green light to move through the Strait?” Ship traffic patterns will provide visible clues.
• Local supply conditions: “Are the refiners able to run at full tilt? Are they able to get the oil they need?”
• Economic activity: Strong travel demand and freight movement could sustain pressure on fuel supplies, even as geopolitical risks ease.

“All of these things now come in to play when you have limited supply,” Eichberger said.