Yves here. This post, where a supposedly well-informed executive dismisses the idea that Iran would close the Strait of Hormuz, a key chokepoint for oil transport, is yet another example of wishful thinking among the investor classes.
And that complacency looks as if it will be tragic. If as many commentators believe, Trump does commit to Iran, these investors did not price that in beforehand, and that is across a huge swathe of risky assets like stocks. We pointed out that investors voting with their feet, by dumping 10 and 30 year Treasuries when Trump launched his Liberation Day tariffs and then got into a tariff hike pissing match with China. It is widely assumed that the Trump retreat (cutting the China levies and lowering the tariffs on other states) was due to the Treasury market upchuck.
If investors were taking war risk, particularly World War III and/or nuclear war risk, as seriously as they ought to be, all sorts of investment categories would have a serious case of the jitters. I am old enough to recall Operation Desert Storm. Stocks had fallen markedly before the launch of the campaign; they jumped sharply when the first-day action went well, illustrating that investors were concerned that the operation could go pear-shaped and were relieved when it didn’t. Even so, American citizens remained cautious. I was commuting weekly to Chicago and the planes were at best 1/3 full for the following months.
So financialization is contributing to a polluted information environment. Donald Trump may believe that if attacking Iran were really all that hazardous, all those well-informed investors would be telling him so by lightening up on equities. Their failure to cut exposures is evidence that the odds of success are high. But this also looks to be led from the top. Due to competing duties, I have not had a chance to check the Fed remarks on its latest rate (in)action and outlook. But a search of the write-ups by Wolf Richter and Michael Shedlock show no Fed mention of war risk.
Back to the headline matter, the question of whether Iran will close the Strait of Hormuz. Recall that we have pointed out that Lloyd’s List, which knows a thing or two about shipping, has said:
Any conflict between Israel and Iran would likely render the Strait of Hormuz closed to shipping, BIMCO’s chief safety and security officer Jakob Larsen said….
Any clash between the two “would be of the greatest concern to shipping in the Middle East Gulf and adjacent waters”, Larsen said.
“While the most likely scenario might not directly impact shipping, any attack will have a certain potential to escalate and impact shipping, as well as implicate military forces of other countries operating in the area, including the US.
“A full-blown armed conflict between Israel/the US and Iran would most certainly effectively close the Strait of Hormuz at least for a period of time and drive up oil prices.”
Security sources have pointed out that there is currently no direct threat to shipping, but in a region where situations can escalate extremely quickly, mariners are being urged to exercise caution when transiting though the Middle East Gulf and surrounding waters.
In light of the view above, we have also pointed out that Iran might not even have to close the Strait of Hormuz, as in take some sort of military action. Enough threat display or even noise-making might lead vessel and cargo insurers to quit issuing policies or price them so high as to make continuing to operate in the Persian Gulf an unattractive proposition. We’ve also linked to stories showing that tanker rates in the Gulf have already jumped.
Reader Safety First pointed out:
Strait of Hormuz.
The commentators I’ve heard talking about it seem to not remember the Iran-Iraq War. During a portion of which Iran quite successfully interdicted tanker traffic in the Gulf by, I kid you not, dropping some WW2 era mines off the backs of motorboats. Apparently, tanker captains are loathe to sail in waters where there is even the possibility of being blown up by a mine. Sissies. Anyhoo, this caused the US to remember that it did still have a small fleet of mine-clearing ships, of which something like eight hadn’t managed to rot in the dock yet, and had to rush them all the way across the Atlantic to clear the waterways.
But my point is, I doubt that Iran has forgotten, and these days besides mines we have things like airborne and waterborne drones. Plus the Houthis on their side of the Arabian Peninsula, next to another maritime chokepoint. So for a short period of time closing the Strait is trivial even without a functioning navy – keeping it closed would require more drastic measures, of course, but will more than a month of oil above $150 really be necessary? The flip side is, of course, that this is Iran’s “nuclear option”, and I doubt they would utilize it until and unless they absolutely had to.
I am not sure I agree with Safety First’s closing claim. In terms of retaliation, the Iran has already threatened to strike US bases and assets in the region if the US attacks. Going there would seem to be a bigger escalatory move, particularly if Americans died, than closing the Strait. The US would have to make a very forceful response, and that sort of punishment could serve as the justification for nuclear deployment. Perhaps I am missing something, but I don’t see closing the Strait of Hormuz as justifying that level of response. But then again, the US may be planning a nuclear strike regardless if it gets in enough hot water.
Regardless, as readers will see soon, the airy dismissal below is stunning. Iran won’t close the Strait of Hormuz because it would be hurt too? This will be an existential struggle for Iran. They recognize they will have to take more pain than what they are suffering now from Israeli airstrikes. The fact that market participants can’t recognize the obvious is striking.
By Charles Kennedy, a writer for OilPirce. Originally published at OilPrice
Despite the strategic importance of the Strait of Hormuz, oil markets currently show little reaction to escalating regional tensions.
Eni’s CEO predicts Iran will avoid closing the Strait of Hormuz due to self-inflicted economic harm.
Regional buyers, such as Indian refiners, are proactively increasing oil purchases from alternative sources like Russia and the US to mitigate potential supply risks.
The Strait of Hormuz may be one of the most strategically sensitive energy corridors in the world, but the oil market isn’t blinking, yet, with Eni CEO Claudio Descalzi predicting Iran will not be able to afford this option.
Brent’s muted response at around $77 per barrel on Wednesday, signals that traders see the odds of an actual closure as remote, despite intensifying hostilities between Iran and Israel.
“It would be very difficult to stop the Strait of Hormuz, because everybody would be affected, including Iran,” Descalzi told Reuters on the sidelines of an industry event. “I think they are more rational than that.”
It’s a risky bet. Roughly 20% of the world’s oil and LNG pass through this narrow maritime bottleneck. Iran has rattled sabers before, but never followed through. Descalzi argues it would be self-defeating: Tehran’s own exports would suffer, and the U.S. would not sit idly by.
Still, market complacency is being tested. Freight rates for tankers surged 40% in five days, showing risk premiums are creeping in. That’s no surprise: a single incident could roil flows overnight.
Some analysts warn prices could spike $30 in a worst-case scenario, with Asian refiners hit hardest. That includes China and India, who consume the lion’s share of Gulf exports. They’re quietly reshuffling trade routes and eyeing West African barrels and longer-haul contracts.
For Eni, the Middle East instability lands as it tries to reshape itself. The company is pushing a €2 billion capital raise by selling part of its Plenitude renewables unit, redirecting cash toward biofuels and low-carbon hydrogen.
Descalzi’s warning underscores how markets are pricing in rational restraint, but regional buyers aren’t taking chances. Indian refiners have already ramped up purchases from Russia and the U.S. for June to offset potential Gulf disruptions.
