After the U.S. and Iran reached a ceasefire memorandum of understanding, what should we watch next? Strategy is here.

On June 15, crude oil futures plunged sharply, primarily triggered by the U.S.-Iran ceasefire memorandum of understanding. Both sides are expected to formally sign the agreement on June 19 and initiate a 60-day confidence-building phase. Subsequently, they will advance negotiations on Iran’s nuclear program and the full lifting of sanctions. The Strait of Hormuz—through which nearly 30% of the world’s seaborne crude oil passes—now has a clear expectation of resumed navigation. Consequently, the geopolitical risk premium previously driven up by Middle East tensions has quickly receded. Markets are also pricing in expectations that Iran’s crude supply will rebound rapidly once sanctions are lifted. According to the latest report from Iranian media outlet Fars News: Iran is granting vessels a 60-day toll-free transit period. After this period ends, Iran plans to generate economic revenue from commercial vessel transits by offering security, navigation, environmental, and insurance services, thereby supporting its domestic economic development.

Over the past period, overseas research reports and some prominent commentators have overlooked weak demand-side fundamentals and generally argued that oil prices are undervalued. However, during our previous roadshows, we consistently held the view that crude oil remains in a state of tight balance. We expect Brent crude’s front-month contract to have peaked around late May or early June and to begin an N-shaped downtrend thereafter. The rationale is that crude’s relative pricing—whether measured by calendar spreads, physical premiums/discounts, or Brent basis—has been steadily weakening, while spot market tightness has not deteriorated further. On the demand side, support is limited to North America’s summer driving season; however, gasoline crack spreads have already peaked and are merely holding steady, while elevated diesel cracks are largely driven by exports. Crude demand-side weakness has exceeded levels seen even during the pandemic year.

Tracing global crude logistics, China’s sharp decline in crude imports has significantly eased tightness across other parts of Asia, while increased U.S. exports have played a key supplementary role. Looking at inventories, global onshore stocks—excluding those in the Middle East and China—have remained stable without further drawdowns. Thus, even at a time when demand appears strongest, oil prices have shown no signs of recovery; relative pricing continues to weaken, and there are no indications of tightness in physical crude arrivals. With the U.S.-Iran memorandum of understanding now finalized, oil prices have declined smoothly as bearish factors are fully priced in, and the prior narrative has been thoroughly realized. Therefore, that concludes this episode.

Source: Kpler, Nanhua Research

Market outlook

The shoe has dropped, but uncertainties remain.

Geopolitically, this round of market moves centered on the Strait began when oil was around $70 per barrel. The current U.S.-Iran memorandum of understanding is largely symbolic of a ceasefire agreement. Within the upcoming 60-day window, core demands from both sides remain highly variable. As evidenced by developments over the past weekend, the two parties still hold differing interpretations of the agreement, raising the possibility of disputes during the 60-day period—such as one side claiming compliance while the other alleges breach. Ultimate decision-making authority in Iran rests with the Islamic Revolutionary Guard Corps (IRGC); statements from other Iranian officials tend to reflect a more moderate diplomatic tone. Recent developments also confirm Iran retains control over the Strait. Should Iran perceive any U.S. actions as violations, Strait navigation could again face restrictions. On the U.S. side, intermittent provocations involving Israel are unlikely to cease, making genuine reconciliation between the two sides improbable in the near term.

The resumption of navigation through the Strait will take time, and restoring production capacity will require even more time.

In the short term, the core focus on the supply side remains on the actual navigability of the Strait of Hormuz. If tensions persist between the parties involved, the most immediate manifestation will be continued difficulty in transit through the Strait. Therefore, key indicators to watch for the full normalization of the Strait include:

1) Types of vessels transiting: Monitor LNG carrier movements. Since LNG carriers are far more vulnerable than crude oil tankers, have extremely low risk tolerance, and are highly sensitive to safety and insurance conditions, the market and shipowners will only resume LNG shipments through the Strait when conditions are deemed 'absolutely safe.' Also monitor ballast (empty) crude tankers entering the Strait;

2) Flow rate trajectory: Recent news reports and Kpler data suggest expectations of improving navigability through the Strait, but current oil prices have already fully priced in a scenario of sustained and stable volume increases in future transits;

3) Gradual drawdown of onshore storage capacity in the Middle East and whether there are plans to restart oilfield production.

Monitor restocking activities by major demand-side countries.

The earlier closure of the Strait of Hormuz caused a loss of 15 million barrels per day in flows, yet the crude oil market remained in a tight balance. This was due not only to the release of floating storage, increased U.S. exports, and strategic petroleum reserve (SPR) drawdowns, but also to a significant drop in demand that narrowed part of the supply gap. Going forward, on the demand side, we need to watch whether major consuming countries will initiate a crude oil restocking cycle:

1) First, countries like the U.S. and Japan that released SPR stocks. SPR releases are essentially borrowing operations. For example, concentrated U.S. SPR drawdowns have left inventories at multi-year lows, creating a clear need for replenishment.

2) Second—and critically—China. During this round of conflict, China smoothly weathered the supply crisis by leveraging ample domestic inventories, supplementing with floating storage of sensitive crude cargoes offshore, restricting refined product exports, and proactively lowering refinery runs, thereby maintaining stable crude inventory levels. If U.S.-Iran tensions ease substantially and the Strait returns to normal operations, high export margins could lead to a normalization of China’s refined product exports, prompting higher refinery utilization rates and a return to normal import patterns, which would generate new incremental crude demand.

Source: Longzhong Information, Nanhua Research

Strategic Recommendation

At this point in time, oil prices are entering a period of tug-of-war. Conditions for crude oil to either continue falling or stage another sharp rally are both quite stringent. For instance, a further decline in crude prices would likely require exceptionally smooth progress in subsequent negotiations between the parties involved, or sustained and stable resumption of shipping through the Strait coupled with demand recovery falling short of expectations—leading to a significant build-up in crude inventories. Conversely, a sharp rally would necessitate the opposite scenario. Currently, it is difficult to make a definitive call on either outcome.

From a Brent valuation perspective, a rational analysis suggests that the front-month Brent crude contract is already relatively well-priced and supported by solid fundamentals. Even if the Strait reopens, the overall logistics recovery, elevated freight and insurance costs, and the time required for oil fields to resume production all justify a premium over pre-conflict price levels.

For more aggressive investors seeking directional exposure, it may be prudent to reduce position sizes or seek safer entry points. Compared to directional trades, we still favor relative-value opportunities—particularly those arising from price distortions or significant deviations in relative pricing caused by the Strait’s closure, which carry strong drivers for long-term mean reversion.

Additionally, within the 60-day window following the memorandum’s signing and the timeframe needed for logistics normalization, energy and chemical products characterized by low output and low inventories still present favorable opportunities for long calendar spreads.

Investment Consulting Business Qualification: CSRC License [2011] No. 1290

Authors: Ling Chuanhui (Registration No. Z0019531) and Shen Weiwei (Registration No. F03140197), Nanhua Research Institute

Important Disclaimer: The content and opinions in this article are for learning and reference purposes only and do not constitute any investment advice. The market carries risks, and investments should be made with caution.

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