Can rising US Iran tensions keep oil above 95 dollars for long

Oil prices are rising are again and this time the Strait of Hormuz is at the heart of the storm. As US Iran tensions flare up, traders are quickly reworking their assumptions on supply risk, inflation and interest rates.

The immediate trigger is renewed confrontation between the US and Iran that has led to a de facto closure of the Strait of Hormuz, a narrow sea lane through which over 20 percent of global oil supply usually passes. Iran has warned commercial ships and many tankers have had to turn back or stay put to the west of the strait. In response, Brent crude has jumped to around 95 to 96 dollars a barrel, rising about 5 to 6 percent in a single session, while US WTI crude has moved to around 89 to 90 dollars a barrel after a near 7 percent spike. Markets are not reacting only to today’s closure, but also to the risk that the disruption may prolong or widen into a larger regional conflict that hits pipelines, ports and storage hubs across the Gulf.

The Strait of Hormuz is the main gateway linking Gulf producers like Saudi Arabia, Iraq, UAE, Kuwait, Qatar and Iran to world markets, and in recent years around four fifths of the crude and fossil fuels leaving this route went to Asia, including India. So, when traffic through Hormuz is threatened, buyers fear that millions of barrels per day could be delayed or blocked, and this fear alone is enough to push up prices in futures markets. Oil is priced at the margin, so even a small risk to supply forces refiners, airlines and shipping companies to pay more today, as they worry that cargoes might not arrive on time tomorrow. Because of this, any statement from Washington, Tehran or other key players about ceasefire, naval escorts or reopening of the strait can cause sharp intraday swings, with prices falling quickly when there is talk of a truce and then jumping again when that optimism fades.

For global markets, higher crude prices raise concerns about inflation returning, as energy is a key input in transport, manufacturing and agriculture, so equity indices and risk assets often react negatively when Brent spikes. In India, where the economy still imports a large share of its oil needs and Asian buyers depend heavily on Gulf supplies, a sustained period of 95 dollar plus Brent can mean pressure on the trade deficit, a weaker rupee and eventually higher petrol, diesel and LPG prices for consumers.