The reopening of the Strait of Hormuz to commercial traffic is encouraging and well timed given the supply shortages of energy supplies in Asia and those about to hit Europe.
The paper price of oil will ease as will gasoline prices in the near term.
One should anticipate little to no impact on the American economy in the near term as demand destruction that has started among lower-income households will continue.
Expectations of lower oil and gasoline prices may bolster spending among higher-income consumers who are likely experiencing a modest tailwind as equity prices reach new highs.
But do not expect a return to pre-war prices. The destruction of energy production facilities as well as refining capacity in the Persian Gulf will take months and in some cases years to repair.
While an outsized decline in the paper price of oil will garner well-deserved attention, one should anticipate a decline in the value of the dollar against a broad trade-weighted basket of currencies
The safe-haven move into the greenback, if the ceasefire is sustained, will quickly correct. In addition, conditions are ripe for a classic overshoot in the value of the dollar as well, as investors ponder the postwar security, economics and financial arrangements in the region.
Since 1974, the petrodollar market has been the foundation of regional economic and financial arrangements in the Persian Gulf. Any significant change to the status quo would call into question the petrodollar market and put further downward pressure on the greenback.
