Oil’s Peace Dividend Is Real But No Return To Pre-War Situation

By K Raveendran

The US-Iran deal marks a genuine easing of one of the most dangerous geopolitical shocks to hit the energy market, but it should not be mistaken for a reset button. The immediate risk of a military breakdown has declined, and that matters for every stakeholder: Washington, Tehran, Gulf producers, Asian importers, shipping insurers and consuming economies already battling inflation. Yet the oil market that existed before the war cannot simply be restored by diplomatic signature. The risk premium has not vanished. It has changed its structure, moving from the visible fear of missiles, mines and naval confrontation to the less dramatic but equally consequential uncertainties of compliance, sequencing and trust.

Before the war, oil prices were already showing a downward tendency. Slowing demand growth, stronger non-OPEC supply, the gradual cooling of speculative positioning and concerns over the durability of consumption in China and Europe had all placed pressure on crude. That bearish environment has not disappeared, but it has been overlaid by a new political memory. Traders, refiners and governments have now priced in the fact that the Strait of Hormuz can again become a pressure point at short notice. That experience has value in the market, and value in oil markets usually translates into a premium.

The most optimistic reading is that the deal opens the way for flows through Hormuz to recover more strongly than many had expected. If sanctions relief proceeds and the ceasefire holds, volumes could rise towards 14 million barrels per day by January, supported by the return of Iranian exports, greater confidence among shipowners and a gradual retreat of the geopolitical premium. That would be a major improvement from the wartime disruption and would ease pressure on import-dependent economies. It would also reduce the urgency of emergency stock releases, shipping escorts and costly rerouting. But even this constructive scenario does not imply a return to pre-war pricing. It implies a transition from acute crisis pricing to conditional normalisation.

The distinction is important. Markets do not only price today’s physical barrels; they price the probability that tomorrow’s barrels may not arrive. A ceasefire can lower the probability of immediate disruption, but it cannot erase the fact that the region remains crowded with unresolved flashpoints. Lebanon remains one of them. Any escalation involving Iranian-aligned actors, Israel, or Western military assets could quickly test the understanding behind the deal. Even if Tehran and Washington intend to hold the line, regional allies and proxies may not interpret restraint in the same way. Energy markets are particularly sensitive to such ambiguity because a small perceived threat to chokepoint supply can have an outsized impact on price expectations.

Sequencing is another weakness. The deal may be positive in principle, but its durability depends on who moves first, how quickly sanctions are lifted, how nuclear-related commitments are verified, and how maritime guarantees are monitored. If Iran expects immediate economic relief while Washington expects staged compliance, friction is inevitable. If shipowners and insurers believe legal waivers are reversible, they will move cautiously. If banks fear secondary penalties, oil trade will resume more slowly than the political language suggests. Physical flows can recover only when the commercial ecosystem around them feels protected. Tankers, letters of credit, insurance cover, port access and refinery procurement decisions all require confidence that the arrangement will survive beyond the next diplomatic dispute.

That is why the market response is likely to be uneven. The first phase is relief. Prices fall from panic levels as traders remove the most extreme war scenarios. The second phase is scepticism. Buyers ask whether barrels can actually move, whether sanctions waivers are enforceable, whether insurance costs fall, and whether Gulf shipping lanes are secure enough for normal scheduling. The third phase is adjustment. If cargoes move consistently and political messaging remains disciplined, the premium compresses further. But compression is not elimination. The war has created a new baseline of caution.

For Gulf producers, the deal is both stabilising and complicated. It lowers the risk of a regional conflict that could damage infrastructure and trade routes, but it also brings additional Iranian supply into a market already attentive to balance. If Iranian exports rise quickly, other producers may need to calibrate output more carefully to avoid a renewed price slide. The pre-war downward tendency in crude prices could reassert itself if demand remains soft and inventories rebuild. But because the market is no longer operating in a clean macroeconomic frame, every bearish signal will be filtered through geopolitical risk. That makes price formation more volatile than before.

For Asian economies, particularly large importers like India, the deal offers breathing space rather than comfort. Lower risk of immediate conflict helps inflation management, external balances and currency stability. Refiners gain optionality if Iranian grades become more available. Freight and insurance costs may ease. But governments will be reluctant to assume that the Hormuz risk has permanently receded. Strategic reserves, diversified sourcing and long-term supply contracts will remain central policy tools. The lesson of the crisis is not merely that diplomacy can reopen flows; it is that dependence on a narrow maritime corridor remains a structural vulnerability.

For Iran, the economic upside is clear. Access to oil revenue, banking channels and transport services could provide relief after prolonged pressure. But the political bargain is demanding. Tehran will need to show enough compliance to keep the deal alive while avoiding the domestic perception that it has conceded under pressure. Washington faces a parallel problem. It must convince allies, markets and domestic critics that sanctions relief does not reward escalation and that nuclear restrictions are credible. Both sides therefore have incentives to claim victory, but not necessarily the same understanding of what victory means. That gap is where future disputes may emerge.

The consensus that oil will not return to pre-war levels rests on this altered psychology. The market has learned that military risk in the Gulf can escalate faster than diplomacy can contain it. It has also learned that the legal and commercial plumbing of sanctions relief is slower than political announcements. Even if flows recover sharply by January, the memory of disruption will remain embedded in freight rates, inventory strategy and hedging behaviour. The market may stop pricing war, but it will continue pricing relapse.

The most credible outlook is therefore neither a full peace dividend nor a renewed crisis premium. It is a middle path: prices ease from wartime extremes, Iranian supply gradually returns, Hormuz traffic improves, and the largest shock scenarios fade. At the same time, a residual premium persists because the ceasefire is exposed to regional escalation, implementation disputes and mutual suspicion. Oil can fall from fear, but it cannot yet fall back into innocence. (IPA Service)