Oil Market’s ‘Worst Fears’ Are Here as Gulf Conflict Hits Hormuz

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(Bloomberg) — The oil market’s nightmare scenario came true this weekend. Now the race is on to deal with it. 

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After tanker traffic through the Strait of Hormuz chokepoint largely came to a halt, the crucial question now is what it will take for the growing flotilla of vessels hovering near the entrance to the waterway to sail again — and how soon? 

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Iran said on Sunday the strait remains open, but it also said it attacked three oil tankers over the course of the day. A self-imposed pause is in place from shipowners and traders as the conflict spreads and after the US declared a maritime warning zone.

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About a fifth of the world’s oil and liquefied natural gas typically flows through the Strait of Hormuz every day, and with just a few hours to go until oil markets open, most traders said they expect Brent crude prices to spike from $72.48 a barrel at the close on Friday. 

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“How this ends is extremely uncertain at this point,” Barclays analyst Amarpreet Singh said. “But in the meantime oil markets will have to face their worst fears.”

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Market Buffers

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The physical market does have some buffers to cushion the disruption. Key Gulf exporters including Saudi Arabia sharply increased their oil loadings in the weeks leading up to the attacks, and the kingdom has storage assets in other parts of the world outside the Persian Gulf and a pipeline to the Red Sea that will allow it to divert some of its exports.

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Global floating inventories of oil have ballooned over the past year, pointing to an oversupplied market, although much of the excess has been black-market Russian and Iranian oil. OPEC+ announced a modest increase in supplies from key members for April, while many countries, including the US and China — the world’s two largest consumers — have strategic reserves of oil to tap if the need arises. 

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Still, an effective closure of the Strait of Hormuz is as seismic as it gets for the global oil market. 

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Across Asia, refiners are trying to delay loading dates for cargoes inside the Persian Gulf, according to traders with knowledge of the matter, though they said they weren’t aware of agreements being made yet. 

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Several analysts and traders said they expected the US would take steps to ensure that traffic resumes through the Strait of Hormuz. President Donald Trump has repeatedly called for lower oil prices, and a surge in fuel inflation would add pressure on the administration to bring a fast end to the conflict. 

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“They may be forced to consider things beyond an air campaign — if maritime traffic is upended for a long period of time — such as a naval escort,” said Aaron Stein, president of the Foreign Policy Research Institute.

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Mixed Messages

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The weekend saw a string of mixed messages around Hormuz. The US first issued a widespread warning to shipping in the Middle East, that one major owner saw as reason to stay away, while Iran later Saturday apparently began issuing radio broadcasts declaring it closed.