At the heart of this optimism lies a single assumption: That the reopening of the Strait of Hormuz marks the effective end of the crisis. For import-dependent economies such as India, this is a big shift. Lower prices of crude oil ease inflation, improve current accounts, and brighten corporate margins. It is no surprise that markets have responded with enthusiasm. But the reality on the ground suggests something else. The notion that Hormuz is “open” belongs more to social-media posts than to shipping lanes. Reports of vessels turning back mid-journey, of warnings issued by Iranian forces, and of insurance costs remaining prohibitively high suggest that this artery of global oil trade is functioning poorly. If a chokepoint requires permission to pass, it is not open. Not surprisingly, having announced just two days ago that the easing of Russian oil sanctions would not be renewed, the US reversed course and renewed it on April 17.
On the diplomatic front, the gap between Iranian and American positions remains wider than the Persian Gulf. The much-discussed negotiations — informally dubbed the “Islamabad talks” — remain in the initial stages. There has been no forward movement on the central questions, which include Iran’s uranium enrichment, nuclear weapons, sanctions relief, unfreezing blocked funds, and the role of regional proxies, Israel’s attacks on southern Lebanon, war reparations, and control and pricing of Hormuz transit. The US continues to claim that its navy has imposed a blockade on Hormuz. Iran claims that as long as the naval blockade remains, Hormuz remains under its control. On Friday, after Mr Trump announced that Hormuz was open, Iran claimed that passage through the strait required coordination with the Islamic Revolutionary Guard Corps. Meanwhile, a few hours after Mr Trump announced that Israel had been “PROHIBITED” from bombing Lebanon, Israeli operations continued, targeting infrastructure linked to Hezbollah. This looks more like a pause than peace.
If markets are indeed forward-looking once again, it appears that all these issues will dissolve soon. Talks are set to resume on April 20. But being forward-looking is not always prudent. In being prescient, markets can also be prone to wishful thinking. Investors have seized upon the most market-friendly interpretation of events: The ceasefire will hold, talks will progress, and oil prices will remain contained. But the US benchmark has been divorced from reality. Actual transactions have little to do with the speculative oil futures contracts traded in New York. Saudi Arabia’s Finance Minister Mohammed Al-Jadaan said on Friday: “You see $90 on the screen… good luck buying a barrel at that price. Real price? $120-160/barrel.” Consider the physical reality of oil. Inventories in parts of Asia and Europe have been drawn down during the disruption, leaving little buffer against renewed shocks. Supply chains cannot snap back instantly. Even if Hormuz were fully operational tomorrow, it would take 40-50 days for flows to normalise and for stockpiles to be rebuilt. During this period, actual transacted prices will remain high, reflecting the reality of supply shortfall. Foreign investors appear to have grasped this fragility more readily than their domestic counterparts. In India, foreign institutional investors (FIIs) have been persistent sellers through April, offloading tens of thousands of crores even as indices climb. Of course, they have also been selling because of a fall in the rupee, which erodes their returns in dollar terms.
The divergence between markets and reality is not unprecedented. Financial markets often move ahead of events, discounting outcomes before they materialise. At times, this prescience is justified. At others, it is merely premature. What would it take for markets to be proven right? I am working with the assumption that Iran has the upper hand now, and hence I would keep an eye on whether Iran’s core demands are being met, which centre on uranium enrichment, tolls on Hormuz, sanctions, and Lebanon. It is hard to see, having imposed a chokehold with Russia and China’s help, why Iran would give away its leverage. The other possibility is the US not agreeing to any of these and launching a fresh round of war, in which case all bets will be off once again.
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