US and Iran Reach Framework to Reopen Hormuz, and Oil Prices Retreat

The United States and Iran have reached a preliminary agreement to reopen the Strait of Hormuz and end Washington's naval blockade of Iranian ports, according to the Financial Times, which reported that the two governments are due to sign the accord on Friday. US President Donald Trump described the agreement as "now complete" and said the strait is open and the blockade will be lifted, The Hindu reported.

The strait carries a large share of the world's seaborne crude oil. The prospect of reopening it reduced part of the extra cost that traders had added to oil prices because of the conflict. In Tel Aviv, the financial daily Globes reported that crude fell sharply on the announcement, that New York equity futures rose by as much as 1.7 percent, and that Goldman Sachs continues to project a price near 90 dollars a barrel later this year. Israeli defense and insurance shares declined, and the dollar weakened below 2.9 shekels.

The change is significant but limited. The New York Times described the understanding as a framework that leaves the most difficult issues, including the future of Iran's enriched uranium and its missile program, to later negotiations. Traders adjusted prices for the immediate threat to shipping, not for the underlying causes of conflict in the region.

The episode is also a reminder that much of the recent rise in energy prices reflected political risk rather than a change in supply and demand. When that added cost disappears, headline inflation readings can fall quickly, which complicates the decisions facing central banks meeting this week. A lower oil price does not reverse the credit expansion already in the financial system, and it can hide that pressure rather than remove it.