Much like other residents in the United Arab Emirates, I woke up somewhere between 0300 and 0400. While some were woken by the relentless missile alerts, I set an internal alarm for around this time – knowing this was the deadline Trump had set for Iran. I rolled over to get my phone to check if things had blown up or calmed down. Fortunately, it was the latter. I left the details for later and went back to sleep.

Once I was up, it was time to inspect things further. Unfortunately, the terms remain unclear at the moment. I’ve seen several different iterations of the 10 point plan proposed by Iran to serve as the basis of new negotiations. So commenting is futile at the moment. What we do know is that there will be a 2 week cessation of hostilities (from the US side I suppose – as strikes continue to be reported in the Gulf countries) in exchange for opening up the Hormuz. Within this timeframe, negotiations for a permanent deal are to take place. Thus, this is the start. Perhaps even the prelude. Almost certainly not the end.

Physical Market

The key question is what does an opening of the Hormuz look like in practice? Certainly, the IRGC has no interest in providing any substantial reprieve. Their leverage is control of the strait. That said, there has to be some good faith underpinning any deal in order to maintain credibility. Should the Americans hold up their end of this bargain, some vessels will likely make their way out (forget about vessels going in) under the IRGC’s purview. Which ones? That remains unclear. Will it be friendly states’ tankers, as we have seen in recent weeks? Will non-friendly states’ vessels be allowed passage? Will friendly states’ vessels carrying non-friendly states’ cargo be allowed? I am not sure. Try your luck in the IRGC’s network of intermediaries.

Reports suggest safe passage will be possible via “coordination with Iran’s armed forces and with due consideration of technical limitations.” That roughly translates to “The Hormuz will remain controlled by the IRGC.” An exclusive from the FT explains that each tanker must email authorities about its cargo, after which it will be vetted. Interestingly, vessels will be given a few seconds (yes, seconds) to pay in bitcoin to the amount of 1$ per barrel of oil.

Ultimately, tanker owners, insurers and crews need to believe the risk has actually reduced before proceeding through. Political assurances are not enough. Fundamentally, physical trade cannot function on unenforceable promises or reversible arrangements. This is the bedrock of the commercial system. And while ceasefire agreements like this are not meant to provide a full commercial and legal framework for safe passage, they should at least get the market talking to each other again about transit opportunities. For now though, physical markets remain paralyzed.

Paper Markets

Brent futures are trading around 94 usd/bbl at the time of writing, down from 115 usd/bbl a few days ago. A huge chunk of the risk-premium has eroded for the time being. The worst-case scenario has been avoided as far as the market is concerned. But prices remain elevated. This reflects ongoing concerns about the (physical) damage done so far and the path forward. So while headline risk is down, the actual market remains extremely tight.

Meanwhile, financial markets reacted positively. Energy futures are down significantly. On the equity side, UAE stocks in particular had a very strong start to the day – rising as much as 7pct. The Stoxx Europe 600 and Germany’s Dax also recorded gains. In general, most indices are in the green (bar the MOEX) as hopes to a resolution edge closer. Asian markets performed quite well. TACO traders were vindicated yet again (though it is fading as traders now expect last-minute relief; thus upside is shrinking with each rebound). The situation was no different in bond markets, with yields falling across the board on the back of market optimism about peace and, in particular, lower inflationary expectations on the back of energy commodity prices falling. The dollar index is also approaching its 1 month low. A textbook reaction across the board, if you will.

A Fragile Truce

In short, while a ceasefire is certainly welcome, the path forward remains to be seen. Ongoing strikes on Lebanon are already jeopardizing the agreement, less than 24 hours in. So it goes without saying that the next 2 weeks will be full of twists and turns. What is certain though is that physical oil markets will remain paralyzed for the time being. Oil flows depend on enforceability – insurance, financing, and safe operations. Until those are in place, this remains a financial repricing, not a functional reopening.