The Strait of Hormuz can’t stay closed for long, and the market knows it.
Since the start of the new war in the Middle East, it has become clear where Iran’s leverage lies. It’s not missile attacks on neighbours, and also not the destruction of infrastructure, since that would lead to the total obliteration of its own facilities.
No, what Iran can control, with very little effort as well, is the Strait of Hormuz.
A global choke point of trade, especially important for oil and gas, fertiliser, and Gulf economies.
Let’s forget the last point for now, because pretty much all major players in the region can afford this conflict, given it doesn’t extend for months, which still seems quite unlikely at the moment. What’s the bigger problem is that approximately a quarter of global oil and LNG consumption passes through the strait. And most countries have no way to divert their exports and use different routes.
The exception here is Saudi Arabia, which uses pipelines to move a large portion of its crude to the west coast and ship from there. Not perfect, but it makes Saudi Arabia arguably the least affected country in the region, both in terms of Iranian strikes and economic consequences.
Other countries that could have been affected massively, because they import a majority of their oil and gas from the region, are China and India. But their ships have now been given permission to pass through the strait.
Less lucky are other highly dependent countries and regions like Europe, Japan or South Korea.
The United States is largely energy independent, however global crude price surges still show up at domestic gas stations, very much to the distaste of Donald Trump.
But what’s the real problem? Why are ships not passing through the strait?
The problem isn’t necessarily strikes. It’s insurance.
Most major insurers have cancelled war coverage for carriers in the region, or at the very least pushed premiums to absurd levels. The U.S. tried to offset this by offering cheaper rates through the government or even escort ships by the Navy, but there has been no real follow-through.
What has happened, however, is what looks like market manipulation.
Specifically, when the Energy Secretary proudly announced that the U.S. Navy had successfully escorted a tanker through the strait. Oil prices plunged following the statement.
But surprise, surprise. That never actually happened.
The post was deleted minutes later and the White House had to step in to clarify.
And that’s not the only attempt to cool down prices. Crude, which is up more than 80% since December, still trades down on every new “TACO” statement made by the president regarding negotiations.
The truth is, nobody knows what’s really going on.
Trump says a deal is close. The Iranian leadership, or whoever is left of them, denies any talks. Still, his rhetoric since the beginning of the war has changed noticeably. No more talk of regime change.
Or maybe replacing one hardliner with an even more radical one is the new definition of “overthrowing the system.”
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