U.S. and Iran Reach Framework Deal but Full Reopening of Strait of Hormuz Still Pending

U.S. and Iranian officials stated on Sunday that they agreed to a framework for a deal to end their war. The agreement would lead to the Strait of Hormuz reopening to oil shipments. Brent crude oil prices tumbled more than four per cent on Monday, hitting its lowest level since early March.

U.S. per barrel. Iran confirmed its agreement to a tentative deal. Implementation of the deal will not start until a signing scheduled for Friday in Switzerland, Pakistan said.

Rory Johnston, founder and CEO of Commodity Context, said the market reaction remains limited compared with recent volatility. "We have an agreement to sign an agreement on Friday to start future negotiations for a further agreement," Johnston said.

Johnston noted that questions remain over the release of frozen Iranian assets, a possible reconstruction fund, and the status of Iran’s nuclear program.

He said negotiation breakdowns could further delay a return to normal passage through the strait. Weeks to months will still be needed to re-establish the same flow of ships through the strait as earlier this year, Johnston said.

U.S. Navy will likely work to ensure it is free of mines, many ships will need to be redirected back to the gulf, and vessels sitting in the strait for months will need to be cleaned of barnacle infestations. "We don’t really have a good historical parallel here," Johnston said.

He added that it will take several months for global oil reserves to be restored and for renewed ship traffic to restart daily oil production.

Mark Parsons, chief economist at ATB Financial, said Alberta oil producers acted cautiously with capital spending over the past few months. Producers are waiting to see whether any drop in oil prices persists, Parsons said. Energy production through the strait could still be viewed as risky because investors now see a greater chance the waterway could be blockaded at any time, Parsons said.