A peace deal nobody has signed

The Persian Gulf peace agreement that mediators had talked up so loudly was still unsigned on 9 June, and markets lurched. The mediators had made confident announcements. The principals in Washington and Tehran had not signed anything binding, and that gap showed how much execution risk traders had ignored.

A memo falls short of a treaty

Traders who had sold crude futures hard, down towards $90, beat a messy retreat when military manoeuvres resumed along the Iranian coast. An unsigned memorandum of understanding is worth nothing, legally or practically, to a shipping line. Marine underwriters said plainly that press releases will not bring war-risk rates down. They want binding signatures from governments, verified de-escalation and physical escorts.

The distinction matters because oil moves only when ships move, and ships move only when they are insured. A tanker owner cannot send a vessel into a listed war zone without war-risk cover, which is priced per voyage and can be withdrawn at short notice. Underwriters in London set those premiums on their judgement of physical danger, not on the tone of diplomatic briefings, so a deal that exists only as a statement changes nothing in the cost of a transit.

How the market got ahead of itself

The sell-off that preceded the retreat followed a familiar pattern. Headlines about a tentative deal prompted funds to cut long positions and add shorts, and trend-following models amplified the move as prices fell. Options markets did the rest: as traders bought puts to bet on a settlement, dealers who sold those puts hedged by selling futures, which pushed prices lower still. None of this required a single additional barrel to reach the market.

When the military manoeuvres resumed, the same mechanics worked in reverse. Short sellers bought back futures to limit losses, dealers unwound their hedges, and the price climbed faster than any change in physical supply could justify on its own. A market that had priced a settlement as a near certainty had to reprice it as a coin toss within days.

The shape of the futures curve told the more honest story throughout. Even as headline prices fell, the premium of prompt barrels over later deliveries stayed wide, because refiners who needed crude this month could not wait for diplomacy. Physical buyers were paying up for oil they could actually receive while speculators sold oil for delivery in a hypothetical peaceful future. When those two groups disagree, the physical market usually wins.

Framework deals with Iran take time

The history of diplomacy with Tehran argues for patience. The framework for the nuclear agreement was announced at Lausanne in April 2015, and the final text was not concluded until July of that year, after months of haggling over sanctions relief and inspections. Even then the deal did not last: America withdrew in 2018 and reimposed sanctions. A signed agreement is a necessary condition for normal shipping, but on that record it is not a sufficient one.

The war with Iraq offers a second lesson. Iran accepted the United Nations ceasefire resolution in July 1988 after years of attacks on Gulf shipping, and traffic normalised only once the fighting had stopped in practice and naval patrols had been in place for some time. Insurers and owners took their cue from events at sea, not from the resolution itself.

Hardliners on both sides

The delay shows how risky it is to treat a negotiation as a finished deal. Hardliners in both capitals are arguing over verification and over the tolls payable in currencies other than the dollar, and the deal could still collapse altogether. Verification is the harder of the two problems. Any settlement that reopens the strait needs an agreed way of confirming that mines have been cleared, that naval units have stood down and that ships will not be stopped, and neither side has much reason to trust the other's word on any of those points.

The toll question is political as much as financial. A charge on transit payable outside the dollar system would give Tehran revenue that American sanctions cannot easily reach, which is exactly why Washington is reluctant to accept it and why Iranian hardliners are reluctant to drop it.

Who gains from the delay

Producers outside the Gulf are the obvious winners. American shale companies, Brazilian and Norwegian producers and the owners of pipelines that bypass the strait all benefit from prices held up by uncertainty. Airlines and shipping firms that had held off hedging fuel costs in the hope of a settlement are the losers, along with the importing economies of Asia that depend most on Gulf crude.

The effect runs through currencies too. Countries that import most of their oil, such as India, Japan and South Korea, pay for it in dollars, so a prolonged spell of high prices widens their trade deficits and puts pressure on the rupee, the yen and the won. Their central banks face the unwelcome choice of tolerating imported inflation or tightening policy into a slowdown.

The case for the optimists

The optimists have a point. Both governments have strong reasons to settle: Iran needs revenue and Washington wants lower petrol prices before the midterm elections in November. Delays over wording are normal in any negotiation, and the fact that the principals are still talking suggests the gap is narrower than the headlines imply. Traders who bought back shorts at a loss could find they sold the recovery too early.

The weakness in that argument is that it prices intentions rather than events. Markets can afford to wait for the signatures; a short position cannot. The indicators worth watching are concrete: a signed text, a published verification mechanism, the first escorted transits and, above all, a fall in quoted war-risk premiums.

Until the signatures are on paper and tankers pass through the strait unharmed, oil is likely to stay near a hundred dollars, and anyone short on the strength of a press release will probably lose money. The first reliable signal of a genuine settlement will come from Lloyd's underwriters cutting war-risk rates, and that is unlikely before a signed text has been in force for several weeks.