Oil Market Underestimates Frictions Beyond a Deal

For weeks now, media reports have been suggesting that Washington and Tehran are moving closer to a memorandum of understanding (MOU). In practical terms, that would extend the current ceasefire by roughly 60 days and create a window to negotiate a more durable peace agreement. The market’s constructive read is straightforward: an MOU should allow flows through the Strait of Hormuz to stabilize quickly, if not normalize outright very soon.

We think that interpretation is a bit too linear. Even if an MOU is signed, it does not automatically translate into an immediate surge in oil supply. The more realistic near-term path is incremental. Any early increase in barrels is likely to come from already-produced crude, including crude sitting on stranded or floating vessels and Iranian cargoes in storage, rather than a sustained restart in production or exports. In other words, this is more about clearing existing bottlenecks than reflating the supply base. At the same time, the market appears to be underestimating the logistical challenges. Tankers have been repositioned globally over the past two months, insurance premia have adjusted materially higher, and operational risk remains elevated. Getting flows back up is not as simple as flipping a switch. Shipowners and insurers will need clarity that vessels can safely transit into and out of the region before meaningfully committing capacity. With residual risks around mines, miscalculation, or a relapse in hostilities, that confidence is unlikely to be rebuilt overnight.

Bigger picture, a more meaningful and sustained recovery in supply likely requires something far more comprehensive than an interim MOU. A full agreement between the U.S. and Iran remains a high bar, with clear gaps still in place across core issues like nuclear constraints, sanctions relief architecture, and the longer-term framework governing transit through Hormuz. These are complex, interconnected issues, and even under best-case assumptions, they are unlikely to be resolved quickly. Realistically, the process could absorb much, if not all, of the proposed 60-day window, pushing us closer to peak summer driving season in the U.S. Crucially, the negotiation phase is unlikely to be smooth. The same complexity that makes a final deal so difficult to achieve also increases the risk of periodic setbacks or flare-ups along the way. Markets tend to discount outcomes; they are less efficient at pricing path dependency. Here, the path matters as any disruption will quickly affect sentiment and flows.

Cushing Inventories on Track to Reach Critical Lows Within Weeks

Source: LPL Research, U.S. Department of Energy, Bloomberg 06/03/26
Disclosure: Past performance is no guarantee of future results.

Meanwhile, the underlying physical backdrop remains tight. Inventories continue to draw at a steady clip and will only keep declining in the event of a prolonged negotiation period. Against that backdrop, the near-term risk profile for crude prices still appears skewed to the upside, in our view. For that outlook to shift in a meaningful way, we would need to see not only a near-term MOU but also clear and tangible progress toward a broader agreement that more permanently restores shipping flows closer to normal levels. At this stage, market participants appear to be getting somewhat ahead of themselves, with pricing reflecting a degree of conviction that may not yet be fully supported by actual developments.