Strait of Hormuz Disruptions Raise Permanent Price Floor for Oil and Food

In early March, global markets reacted sharply to military strikes between the U.S., Israel, and Iran, pushing Brent crude above $80 per barrel. A cease-fire later eased tensions, but the Strait of Hormuz, a critical energy chokepoint, remains partially disrupted. This narrow passage normally handles 20% of global oil and 25% of liquefied natural gas shipments. Post-conflict, vessel traffic plummeted from about 100 ships daily to single digits, cutting oil flows by half. As of early April, many tankers still rerouted around the Cape of Good Hope, adding significant time and cost to shipments.

The cease-fire did not fully restore normal traffic through the strait, leading to lasting impacts on oil supply and prices. Major Gulf producers cut at least 10 million barrels per day of output in March, and refining capacity dropped by over 3 million barrels daily. The International Energy Agency reported an 85-million-barrel drop in global inventories, shifting the market from surplus to tighter balance. Experts warn that several million barrels per day of capacity may not fully recover due to damaged facilities and financing constraints.

Oil prices also face a persistent risk premium, estimated at $18 per barrel by Goldman Sachs, reflecting fears of prolonged disruptions. Rerouting costs, including extra fuel, insurance, and crew time, continue to accrue and will gradually affect global supply chains. These factors suggest a permanent increase in the floor for energy prices, with widespread economic effects expected over the next year or two.

The disruption extends beyond oil to critical food supplies. The Strait of Hormuz carries 30-40% of global urea and synthetic ammonia exports, essential for fertilizers. Shipping delays and rerouting caused fertilizer prices to spike, with FOB urea prices in the Middle East and Egypt jumping from $400-500 to over $700 per ton. U.S. urea prices at the Port of New Orleans rose by over 25% in a month, raising farming costs and potentially leading to higher food prices.

Nitrogen fertilizer, accounting for around 20% of grain production costs, is a major input for staple crops. Analysts warn that this fertilizer crisis could surpass the 2022 surge driven by the Russia-Ukraine conflict and European natural gas shortages. The disruption in Hormuz shipping is creating similar supply chain pressures, with long-term implications for global food prices.