Hopes are rising for an early return to free passage in the Strait of Hormuz, as its closure nears the 3 month mark:
- Iran recently announced the launch of a new Persian Gulf Strait Authority
- This is aiming to take control of the whole Strait as the map shows
- And it includes a claim to territorial waters belonging to Oman and the UAE
This development highlights how wars can easily develop a life of their own, once they start. As the Italian diplomat Niccolò Machiavelli wisely noted back in 1521:
“Wars begin when you will, but they do not end when you please”
If a deal is not reached soon, the problems will quickly multipy.
PRESIDENT TRUMP STILL HOPES FOR A QUICK DEAL
President Trump is still hopeful that a deal can be done as the New York Times quotes confirm:
- He has suggested since the US/Israel attacks began on 28 February that it would be over quickly
- But as the Wall Street Journal reported, his top generals warned that Iran might instead close the Strait
Since then, Pakistan has been trying to broker peace talks. But whilst US stock markets soar every time new talks are proposed, there have been mixed reports on actual progress. As The Atlantic comments:
“Iran’s terms for a settlement are those of a victor: They demand war reparations, no limits on uranium enrichment, recognized control of the Strait, and an end to sanctions.”
CRUDE OIL & PRODUCT INVENTORIES ARE FALLING
The initial impact of the closure was reduced by 2 key factors:
- The IEA authorised the release of 400mb from strategic stocks to calm markets
- And many governments adopted crisis measures to reduce consumption
- But latest data shows that US oil inventories are now seeing a major fall, as Investing’s chart confirms
- They fell by 7.9mbd in the latest EIA report, three times analyst expectations
The chemicals industry tells the same story, with growing shortages of chemicals and polymers, as the Financial Times reports.
And as I.C.I.S. report, the industry is now warning that the disruption will now likely last into 2027 – even if the war ended today: “The conflict in the Middle East is driving a petrochemical supply disruption which will stretch well into next year”.
CHINA AND INDIA ARE NOW SHIPPING THROUGH THE STRAIT AGAIN
At the same time, major countries are now starting to do their own deals with Iran, as the Lloyd’s List Intelligence chart shows:
- The volumes are still relatively small, compared with the ~770 transits/week before the closure
- But they reached 54 transits/week in Week 20 as Iran agreed deals with China and India
- And 92 of the world’s 513 sanctioned ships in the world are now in the Middle East
- They are sailing under ‘false flags’, which makes it hard to stop them moving sanctioned Iranian product
THE WORLD RISKS HAVING TO SOON CUT OIL DEMAND
Leading oil analysts, Rapidan, are now warning that:
“A closure of the Strait of Hormuz through August raises the risk of an economic downturn that comes close to the scale of the Great Recession in 2008“.
Similarly, the head of the IEA is warning that the global economy risks entering a “red zone“. The closure is removing 14mbd of oil supply, and as Reuters calculations show:
“At that pace, the final supplies from the initial 400mb release will hit the market by the start of August, coinciding with Birol’s potential red zone”.
Financial markets still assume that the Strait will reopen by late May and traffic resume in June. But this timetable is optimistic. And as Reuters also warns:
“The breaking point may yet remain elusive — thanks to a combination of policy choices, price responses and geopolitical developments — but it is steadily drawing closer. And if it ever does arrive, it will pack a punch.” (our emphasis)