Hormuz Crisis Looms as Oil Prices Threaten to Soar

Bank of America's commodities and derivatives research head, Francisco Blanch, warned that oil prices could climb into the winter if there is no agreement between the US and Iran to reopen the Strait of Hormuz. The current tanker traffic through the strait is a fraction of pre-war levels, with only around 5-10 ships per day passing through compared to 140 before the war.

The bank estimates that traffic would need to recover to around 80-100 ships per day just to stabilize energy markets. Blanch emphasized that while there is enough crude oil for now, there are severe shortages in diesel, gasoline, and global natural gas markets. He also pointed out that refining margins have reached record levels due to high diesel crack spreads.

Diesel crack spreads, which measure the difference between diesel and crude prices, have surged to $80-$85 per barrel, exceeding the price of WTI crude. This has caused significant shortfalls in end products in energy markets. Blanch also warned that failure to secure an agreement could lead to another escalation.

Bank of America is urging investors to become more defensive due to its bull-and-bear indicator climbing to 9.7, its highest since 2021. The bank's chief investment strategist recommends reducing exposure to risk assets rather than adding to positions.