Murkiness of Hormuz timetable threatens an oil price spiral

US President Donald Trump’s recent state visit to China has done little to end the stalemate in the Strait of Hormuz. If anything, Iran appears to have been emboldened enough to escalate Gulf tensions through drone strikes near the Barakah Nuclear Energy Plant in Abu Dhabi and rocket attacks targeting sites in Saudi Arabia.

Brent crude trading at about $110 a barrel has coincided with a brutal sell-off in the US Treasury market, pushing the yield on the bellwether 10-year note towards 4.7 percent as Wall Street increasingly prices in prolonged disruption to shipping through the strait.

Markets are also beginning to confront the wider economic fallout. Any sustained interruption to GCC diesel and fertiliser exports risks wrecking both the summer driving season and the North American planting season – a combination likely to stoke inflationary pressures further.

Trump, meanwhile, has warned Tehran that “the clock is ticking”, and the threat of renewed confrontation means tanker traffic via Hormuz could plunge in the weeks ahead.

The geopolitical risk premium now embedded in oil markets is converging with broader inflation fears, driving bond yields higher and fuelling a vicious macroeconomic cycle that threatens fresh waves of domestic instability around the world.

Trump’s Republican Party risks losing control of Congress in the November midterm elections, as gasoline prices and mortgage rates continue to climb.

It is also evident that $110 Brent is no longer an accurate barometer of physical oil markets, with diesel and jet fuel mostly available only to downstream clients in Asia and Europe at closer to $200 a barrel.

Data from the International Energy Agency (IEA) suggests the world economy is facing the biggest energy security crisis in modern history, with more than a billion barrels of Gulf crude exports effectively removed from global markets since Iran disrupted shipping.

Saudi and Emirati bypass exports through the Yanbu and Fujairah overland pipeline networks do not come close to offsetting the crude volumes normally transported through the strait. About 20 million barrels a day – equivalent to one-fifth of global oil consumption – typically pass through the waterway by tanker.

As of mid-May global oil markets still face an effective supply shortfall of about 13 million barrels per day that no other producing region can fully replace.

The surge in crude oil and refined-product prices is already rippling across economies in the Middle East, South Asia, Europe and Africa. Petrol rationing, four-day work weeks, surging inflation, widening budget deficits and sharply higher bond yields threaten to push the global economy into recession.

We could also yet see the worst sovereign debt crisis in emerging markets since the Asian and Russian currency meltdowns of 1998.

The IEA estimates that more than 80 energy infrastructure assets across the six Gulf states and Iraq have been damaged since the start of Trump’s “Epic Fury” military campaign on February 28.

Even if Trump and Iran were to sign a peace agreement and immediately reopen Hormuz to tanker traffic, Saudi, Emirati, Qatari, Kuwaiti and Iraqi oil production would still struggle to recover to pre-war levels before the end of 2026.

Qatar estimates that extensive war damage to its Ras Laffan Industrial City complex – the world’s largest liquefied natural gas hub – will result in a 17 percent loss of productive capacity that could take up to five years to repair.

Logistical factors also preclude any immediate reopening of the strait to tanker traffic, even if Washington and Tehran agree to lift their rival naval blockades. The UN’s International Maritime Organization has identified about 800 vessels that could eventually participate in an evacuation framework once security guarantees are in place.

Tanker owners are reluctant to risk crews’ lives in what has effectively become an active war zone. Naval mines, drone strikes and attacks on neutral shipping have dramatically increased the dangers associated with transiting the chokepoint.

While Lloyd’s of London and other marine insurers continue to offer some cover, war-risk premiums have surged to prohibitive levels, rendering many voyages commercially unviable.

In practice, soaring insurance costs, crew safety concerns and mounting operational uncertainty have made large-scale commercial shipping through Hormuz impossible for the moment.

This is a far more serious energy crisis than the 1979 oil shock that followed the Iranian Revolution. Pahlavi Iran accounted for only 4 percent of global oil supply, yet the closure of Iranian oilfields still triggered panic buying by Japanese refiners in Rotterdam, pushing crude to an inflation-adjusted peak of roughly $178 a barrel.

The uncertainty surrounding any post-Hormuz reopening – combined with Trump’s lack of a diplomatic breakthrough capable of resolving the deadlock – means a year-end Brent price of $150 to $180 a barrel is no longer unthinkable.