Markets 
A peace deal has been reached between the United States and Iran, but getting oil to flow through the region again and helping gas prices return to pre-war levels may be more of a challenge.
That’s because the physical and economic damage done means consumers will need to get used to a “new normal,” according to at least one expert, where gas prices stay elevated for the foreseeable future.
“It’s optimistic that we might actually have an end to this conflict, and we might get some oil flowing through,” says professor of international business David Detomasi at the Smith School of Business at Queen’s University.
“We got comfortable with the fact that shocks were rare and that we could deal with them when they happen. Now they happen all the time — this is the new normal.”
The conflict has not only scarred the region, but has left a massive bottleneck in the Persian Gulf region, and it will take some time before oil and energy markets can catch up after several months of choked-off supply chains for oil, natural gas, fertilizer and other products.
Here’s what to know.
U.S. President Donald Trump announced Sunday on his social media platform, Truth Social, that a peace agreement with Iran had been reached. That was also confirmed by Pakistan’s prime minister.
Trump, in his social media post, has also said energy prices will “drop like a rock” once the Strait of Hormuz reopens.
Prior to Sunday’s announcement, Trump had claimed multiple times that a ceasefire agreement was imminent, only to see fighting resume.
Get breaking National news
Get breaking Canada news delivered to your inbox as it happens so you won’t miss a trending story.
So what makes this time different?
Detomasi says it’s because of the “deliberate inclusion” of other parties, as opposed to just Trump claiming a deal had been reached. This includes Pakistan confirming the announcement, which has been acting as an intermediary between Iran and the U.S. during negotiations.
Having both sides agree is a key signal of optimism that this deal could stick, but for oil and energy markets to truly see relief, the Strait of Hormuz needs to be fully reopened to shipping traffic again.
“The number one thing that we will need to see is actual movement of ships through the strait,” says economist Marc Ercolao at TD Economics.
“That’s what’s been holding back global oil supply. That’s materially tightened energy markets over the last little bit, and there seems to be, at least on the Iranian side, some go-ahead that this will happen.”
Although reopening the strait will no doubt get oil flowing again through the Persian Gulf region, it may not be as simple as opening a faucet.
“Even if you open up the strait, that doesn’t necessarily mean that the oil can flow freely if it’s bottlenecked by not being able to reach the port in the first place. There were some facilities on the other side of the Strait of Hormuz that were also damaged,” says economics professor Moshe Lander of Concordia University.
“There’s going to have to be some agreement here that not just you’re opening up Strait of Hormuz, but that you’re also going to allow parts and materials in to be able to get this rebuilt. That could take itself another couple of months as well.”
The peace agreement is scheduled to be signed in Switzerland on Friday.
However, if the Strait of Hormuz were to fully reopen to shipping traffic once the agreement is signed, how long will it take for prices at gas pumps to fall to levels seen before the Iran war began in February?
“The pump prices, gas prices, they typically adjust within days to weeks because retail prices are a reflection of what’s happening in the wholesale markets. So on the margin, we should expect some relief in the next couple of weeks, for sure,” says Ercolao.
“However, the entire normalization process of energy markets is going to take months. It’s going to be uneven. It’s going to be slow. We will not see drastic price decreases.”
Crude oil price movements are one of the main factors determining what consumers pay at gas pumps — including in Canada.
If there’s less oil available globally to meet expected demand for things like gasoline and jet fuel, then prices typically will rise. They can also fall if demand for those products falls or if there is an oversupply of oil, or both.
Expectations of a ceasefire and the strait reopening suggests a substantial increase in global oil supplies is on the way, which should translate to some relief as gas pumps this week.
As of publication, U.S. oil (West Texas Intermediate) was priced at about US$80 a barrel. That’s down from a recent peak during the conflict of about $113 in May, and still above about $65 in the days before the war began.
The national average for regular gasoline in Canada currently sits at just below $1.66 a litre, according to CAA. That’s down from about $1.90 a month ago, and $1.35 one year ago, while some consumers were paying well over $2 a litre at local gas stations.
McTeague says Canadians can expect gas prices to drop roughly 10-15 cents per litre over the coming days and weeks, meaning they may not get much lower than $1.50 for the national average anytime soon.
“Crude vessels run at the speed of a small bike. And so for a country to take delivery, maybe two or three months, not to mention the damage, physical damage that’s been done to many of the oil fields in the Persian Gulf, as well as some of those older oil fields that have also been disrupted,” says McTeague.
“It’s going to take a long time for things to get back to normal — that means higher prices for longer.”
If a peace deal with Iran becomes a permanent and long-term agreement, it could take months, or even into next year before prices return to levels seen before the conflict began — if at all.
Lander says it could take three to four months before oil prices return to the $60 a barrel range, and that’s only if the deal holds and all facilities are repaired and shipments return to the levels seen before the war began.
Others think it will take even longer.
This means it could be by the end of the year before prices return close to pre-war levels again, but there could be other shocks to oil markets like geopolitical issues that will delay the process of normalization.
“The deal will have to hold indefinitely for the next one to two years. The normalization process for energy markets is going to take some time,” says Ercolao.
“We might not even get back to pre-war levels but we will definitely get back to manageable energy levels into 2027.”
Read the full article here
