Oil Markets Brace for Long War as Iran Closes Hormuz

Over the weekend, the Houthi movement claimed missile and drone strikes on Saudi Aramco facilities in Riyadh and Khurais, though the Saudi-led coalition dismissed these claims as misleading. Meanwhile, Iran’s parliament speaker, Mohammad Bagher Ghalibaf, announced that the Strait of Hormuz would remain closed until the U.S. meets seven unspecified conditions. Despite these developments, Brent crude oil prices held steady around $102, suggesting markets are now treating the situation as a prolonged conflict rather than a sudden shock.

The premiums in the oil market tell a more nuanced story. Murban crude, a key grade for Asian refiners, traded near $110, about $8 above Brent. The Brent-WTI spread widened to over $11, and very large crude carriers are earning around $1.3 million a day, a significant increase from January rates. While global oil supply remains stable, the real issue is the lack of safe and insured passage through the Gulf.

This dynamic benefits certain players, such as American producers who sell into a market paying a premium for barrels that avoid the Gulf, and tanker owners who are earning windfall rates. However, importers like Japan, South Korea, India, and Europe face higher costs due to increased freight and war-risk insurance. Aramco’s decision to cut its Arab Light price for Asian buyers by $3 reflects an effort to retain customers who are already bearing these additional costs.

The situation also has broader economic implications. Oil prices above $100 contribute to sticky inflation, influencing central bank policies like the Federal Reserve’s decision to raise rates to 3.75-4.00% in September. The 10-year Treasury yield remains near 5.2%, and gold’s 3% drop during the war week indicates that yields are outweighing fear. The West’s countermeasures, such as the G7’s 100-million-barrel stock release, have had limited impact, and the strong dollar is putting fiscal pressure on allies like France and Japan.