Ceasefire brings relief to financial markets – but it is far from absolute | Strait of Hormuz
The decline in oil prices, the rise in the stock market and renewed hopes for the global economic outlook. After the two-week ceasefire declaration in the Iran war, relief was felt in the financial markets. However, it is far from absolute.
The economic damage has been mounting over the past six weeks as the virtual closure of the Strait of Hormuz by Tehran triggered the worst energy crisis of the modern era.
Steps towards peace must limit further costs. In a world where fossil fuels still drive economic activity, any progress towards restarting shipments through the critical waterway for a fifth of global oil and gas supply would ease fears of an apocalyptic supply crunch.
However, the situation remains highly volatile, with Tehran and Washington giving conflicting messages about whether the Hormuz canal is open, and Israel continuing to attack Lebanon. Economic risks still remain due to uncertainty regarding a lasting peace in the Middle East.
Enough damage has already been done to guarantee permanent results. Consumers are already feeling the pinch as prices for energy products are still higher than before the war. Bombed oil and gas facilities, disrupted transportation, and halted production lines cannot be repaired overnight.
Even after the more than 10% drop in the oil price on Wednesday, Brent crude remains above $90 a barrel; This is significantly higher than before the start of the war, when the global oil benchmark was trading below $73 per barrel.
This still stands as progress compared to a long conflict that kept the price above $100 per barrel. The worst-case scenario, in which oil prices remain constantly high, could risk triggering recessions in many countries around the world.
However, despite the temporary steps taken towards peace, most economists predict that oil prices will remain above pre-war levels throughout 2026.
In its post-war “baseline” forecast, consultancy Capital Economics predicts that oil prices will fall but still finish the year at $80 a barrel. Under this scenario, headline inflation rises to around 3-4% annually in the US and Europe, while GDP growth slows in most major economies.
Economists say the unpredictability of both Iran and Donald Trump increases uncertainty and risk. Before the conflict, few economists predicted that Iran would follow through on its threats to close the Strait of Hormuz.
The possibility of closing the critical waterway had previously been raised by Tehran during almost half a century of tensions with Washington since the 1979 Iranian revolution, but no action was taken.
Given the importance of the canal to its economy and the rest of the world, and the US response to any closure, the risks were thought to be very high. Now this logic has changed.
As a result, this persistent uncertainty can negatively impact activity or at least add an additional premium to the cost of doing business. This will have far-reaching consequences for a region that is the cornerstone of the world economy.
The International Monetary Fund makes this warning in a timely report released Wednesday. Typically, it finds, wars since 1946 have left lasting “economic scars” that may take more than a decade to heal.
“Political and economic uncertainty that persists despite peace may continue to reduce the expected return on investments, sustain capital outflows, and restrict both investment and labor supply,” the report says. The situation in the Middle East provides a clear example today.
