Reopening of Strait of Hormuz to Lower Tail Risk, But Supply Normalisation to be Costly: S&P

On June 17 the United States and Iran reached a memorandum of understanding that included a commitment to reach a final agreement within 60 days. The MoU also refers to reopening the Strait of Hormuz and passage of commercial ships without any charge.

The S&P in its report said the US-Iran MoU is constructive, but hard issues, like Iran's nuclear programme, sanctions relief, regional security, and Israel's security concerns, still remain unresolved.

"Shipping, insurance, port, and operational constraints could also delay a return to pre-conflict flows," S&P said in its report titled 'Hormuz reopens, fragility remains'.

S&P maintains Brent assumption at USD 110 per barrel on average for the rest of 2026, before lowering it to USD 80/bbl in 2027 and USD 65/bbl from 2028.

"A Hormuz reopening reduces immediate tail risk, but Asia-Pacific still faces slower, costlier, and more fragmented operating conditions," said Eunice Tan, head of Asia-Pacific credit research at S&P Global Ratings.

Brent crude prices have retreated to below USD 80 and the liquefied natural gas Japan Korea Marker (LNG JKM) is near USD 15 per million British thermal units (MMBtu) after the MoU.

S&P said these have eased the headline shock, but does not mean physical markets have healed.

Slow resumption of flows could keep energy, freight, and input-cost pressure elevated across petrochemicals, agriculture, transportation, and logistics. Most exposed are energy, downstream sectors, and emerging markets with thin external and fiscal buffers, S&P said.

The Strait of Hormuz also carries refined fuels, naphtha, fertilizers, and industrial feedstocks, so slower flows can have effects beyond energy.

S&P said South Asia is especially exposed to second-order risks of the West Asia conflict.

India is the world's largest urea importer and relies heavily on Gulf suppliers, India is the world's largest urea importer and relies heavily on Gulf suppliers, while Bangladesh and others depend on imported fertilisers and gas-linked nitrogen production.

"Alternative supply from North Africa, Russia, China, or higher-cost Europe could help but would be slower and costlier. If fertiliser tightness overlaps with weather stress, it could rapidly affect crop yields, food prices, household purchasing power, and subsidy burdens," S&P said.

"Central banks face a tough trade-off: Tightening policy could help contain inflation and currency depreciation but would weigh on growth; whereas staying put could leave currencies and capital flows more exposed," Tan said.