Mines, broken logistics, damaged infrastructure: it will take months to restore normal shipping through the Strait of Hormuz

After three and a half months of war, the United States and Iran have reportedly reached an agreement that will end the conflict and allow the Strait of Hormuz to reopen. Oil, natural gas, and fuels will once again flow through the Middle East, thereby averting a critical point where reserves would have been depleted and an irreversible economic recession would have struck much of the world. The price of oil has fallen sharply following the announcement of the agreement, in an initial reaction of relief from governments, businesses and consumers, but a return to normalcy will not be an easy task—and it is by no means imminent.

A daunting task lies ahead, starting with the de-mining of the Strait. Restoring traffic to normal levels requires clearing the shipping lanes until they are deemed safe by shipping companies and the insurers that cover the risks. This will be followed by the management of maritime traffic—with more than 500 ships stranded in the area—the reopening of wells shut down due to inactivity, and the repair of energy facilities damaged during the conflict. In short, post-war reconstruction efforts that will take weeks and months and could delay the full restoration of pre-conflict energy supplies until the end of the year.

The reopening of the strait will be the first step—a crucial one for the global economy—but not the end of the negotiations. During a 60-day ceasefire, the United States and Iran will negotiate the terms of a final agreement that includes such contentious issues as Iran’s nuclear program, the lifting of sanctions, and a reconstruction plan for the country. Tehran has demonstrated that it holds the key to the Strait of Hormuz and has the ability to block international trade through it. A return to normalcy necessarily depends on the negotiations not derailing during those 60 days. And even then, it will not be enough time to restore normalcy after a conflict that will leave a deep mark on the energy market.

“It won’t be until the end of the year that we’ll return to pre-war traffic levels in the Strait of Hormuz. The area needs to be cleared of mines, which could take a few weeks. No one is going to want to be the first to venture in; shipping companies and insurers are going to wait,” notes Jorge León, head of geopolitical analysis at Rystad Energy. Thus, maritime traffic will gradually resume over the coming weeks and months, provided no new setbacks arise along the way. The reaction of shipping companies and insurers will be decisive: they were the first to halt their operations in the Persian Gulf when the U.S. and Israel began bombing Iran, even before the Iranian Revolutionary Guard decided to shut down the strait to shipping. The industry is now reacting with the utmost caution to the agreement and, for the time being, does not see the area as safe enough to venture through.

“The extent of the damage caused by the war to the oil infrastructure is unclear,” says Paul Donovan, chief economist at UBS Wealth Management. Forcing the closure of the strait was easy for Iran, just as the double blockade imposed by the United States was almost immediate. Reopening it after a war will be much more difficult now that Tehran has demonstrated its ability to impose a blockade to the world, thereby sowing a seed of mistrust among shipping operators and insurers that is likely to persist over time, in addition to driving up the cost of insurance policies and the price of goods. “Key issues, such as the scope and timeline of sanctions relief or the exact definition of free transit through the Strait, have not yet been resolved. Even if a final agreement is reached, its implementation continues to pose high risks, which could leave regional security more fragile than it was before the conflict,” explains Christian Schulz, Chief Economist at Allianz Global Investors.

Clearing the mines in Hormuz could take between 40 and 50 days according to industry estimates; repairing the damage to the Persian Gulf oil industry will require “tens of billions of dollars,” as the IEA recently warned. Specifically, the agency estimates that more than 30 energy facilities have been damaged, either moderately or severely, including refineries, petrochemical plants, oil and gas production facilities, and two of the 14 liquefaction lines at the massive Ras Laffan liquefied natural gas complex—the largest in the world—whose repairs could take several years.

Once the logistical and security challenges have been overcome, and if the final agreement between the U.S. and Iran is successfully concluded, analysts agree that the conflict will lead to higher oil prices. Once the initial reaction of the past few days subsides—during which Brent crude has plummeted to around $80 per barrel—the oil market faces months of rebuilding strategic oil reserves, which have fallen to critical levels due to the supply cut. Replenishing these emergency reserves will therefore keep pressure on prices, while Gulf countries finish repairing their energy infrastructure and restarting facilities shut down by the war. “It will take several months for the oil market to normalize, and global inventories at historic lows are expected to keep energy prices well above pre-war levels,” concludes the asset manager at Edmond de Rothschild AM.

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