Iran and the United States concluded a round of indirect talks in Qatar, focusing on issues that supposedly had been resolved when an interim agreement was announced two weeks ago. The two countries spent two days in Doha discussing maritime traffic in the Strait of Hormuz and unfreezing Iran’s funds, two issues under the initial agreement. The next meeting will take place after the funeral processions for Iran’s late Supreme Leader Ayatollah Ali Khamenei, who is due to be buried on July 9. The initial deal calls for Iran and the United States to allow shipping to resume through the Strait of Hormuz. While marine traffic has resumed to some extent, the status of the strategic waterway remains unclear, particularly because Iran plans to charge fees for using the strait after the initial ceasefire ends in 60 days, in mid-August. With traffic moving through the strait, oil prices have fallen to their lowest level in four months.
The governments of Iran and Oman — the two nations with coastlines along the strait — recently announced that the waterway would have “costs associated” in line with international standards. Panama and Egypt collect fees for the use of the Panama and Suez Canals, respectively, where fees can amount to hundreds of thousands of dollars for the largest cargo vessels. Those canals, however, are man-made at considerable expense and are not natural waterways, like the Strait of Hormuz. Further, both Egypt and Panama were given explicit permission in treaties to charge tolls, and the canals are subject to international agreements that guarantee freedom of navigation to any vessel.
Turkey charges service fees for ships transiting the Bosporus and Dardanelles Straits, which are natural waterways, under the 1936 Montreux Convention. That law predates the United Nations Convention on the Law of the Sea (UNCLOS), which took effect in 1994, giving ships the right of innocent passage through any country’s territorial waters without paying a fee. Iran signed but has never ratified UNCLOS. The Montreux Convention obligates Turkey to allow commercial ships freedom of passage but permits it to charge for certain services associated with passage, including sanitary, pilotage, towage, and lighthouse services.
After Oman issued the announcement with Iran, Omani Foreign Minister Badr bin Hamad Al-Busaidi insisted that there would be no transit fees, but he did not rule out fees for navigational, environmental, or other “services,” similar to those collected on the Straits of Malacca and Singapore, where pilotage service fees are voluntary.
Some believe that Iran could be persuaded not to impose charges on the strait if the United States agrees to lift sanctions on Iran. According to U.S. Treasury Secretary Scott Bessent, under current conditions, China is the only country that continues to purchase Iranian oil. Other nations are refraining from buying it due to the potential reimposition of U.S. sanctions. As a result, Iranian oil continues to be offered at a discount on the market. Bessent also noted that the market conditions could provide further motivation for Iran to pursue negotiations with the United States.
Further, oil flows through the Strait of Hormuz have rebounded to more than 10 million barrels a day with U.S. military support, which reduces Iran’s leverage in talks over a longer-term transit agreement. With at least 10 million barrels per day of oil getting through daily, combined with another 5 or 6 million barrels per day moved via alternative pipeline routes in Saudi Arabia and the UAE, flows are approaching normal levels.
That has helped push Brent futures down by about 30% this quarter — the steepest quarterly drop since the pandemic, prompting Morgan Stanley to lower its oil price forecasts for the second time in about two weeks. The bank now expects Dated Brent oil to average $75 per barrel in the third and fourth quarters, down $15 and $5 per barrel, respectively, and be at $70 per barrel at the end of 2027. High U.S. exports and weak Chinese imports, with Hormuz flows recovering, could shift the oil market back into surplus. The oil market now believes the probability of a prolonged supply disruption has declined and that the global economy remains well supplied with oil.
Conclusion
Issues with the interim agreement between the United States and Iran appear to be progressing, but uncertainty persists. Iran has announced it wants to charge fees for passage through the Strait of Hormuz. Some believe that if sanctions are removed, Iran will be able to garner enough funds to allow free passage. However, China is Iran’s only current buyer of oil, as other countries are worried that the United States will impose sanctions again. Enough oil is transiting through the strait and through alternate pipelines that flows are approaching normal levels, so some forecasters think the market could shift back to a surplus.
