The situation in Iran is refocusing global markets on the core variable of oil prices. Analysis suggests that if shipping through the Strait of Hormuz is disrupted, rising crude prices could amplify into global liquidity fluctuations via inflation expectations, monetary policy, and carry trades, further driving a reconfiguration of supply chains and industry structures.
Following attacks on targets within Iran, markets initially priced in short-term supply disruptions. Crude oil spot prices surged nearly 12% at Monday's open. As conflicts escalated, expectations for more severe transport interruptions were adjusted upward, pushing oil prices higher amid volatility. At the time of writing, Brent crude was quoted at $82.5 per barrel.
Tangible signs of strain have emerged in shipping. After the attacks on February 28th, multiple major oil companies and trading giants announced suspensions of oil and fuel vessel transits through the Strait of Hormuz. Monitoring data indicated that speeds of surrounding tankers generally dropped to zero.
It is believed that markets have not yet fully priced in the risk of a Strait closure. The true depth of the impact depends on the severity and duration of any disruption. A mild blockage might push inflation higher, whereas a significant obstruction could trigger renewed monetary tightening and a shift in liquidity conditions.
The critical chokepoint is the Strait of Hormuz itself, not Iran's export share. Although Iran holds the world's third-largest proven crude oil reserves, approximately 200 billion barrels, and the second-largest natural gas reserves, its 2024 crude exports accounted for only about 2.6% of the global total, with natural gas exports around 0.7%, constrained by sanctions and technology. Global pricing is determined not by Iran's supply directly, but by the Strait's navigability.
Data shows that in 2024, approximately 20.3 million barrels per day of oil and other liquid fuels transited the Strait of Hormuz, representing about 20% of global consumption and 27% of global seaborne oil trade. In the same year, roughly one-fifth of global liquefied natural gas trade also passed through this route, with 84% of crude and condensate flows directed toward Asia.
Alternative routes are limited. Estimates suggest that even if Saudi and UAE bypass pipelines operate at full capacity, they could only provide about 2.6 million barrels per day, substituting for approximately 15% of the Strait's volume. The extent and duration of any closure will determine the ceiling for oil price impacts and the slope of market pricing.
Four scenarios illustrate the non-linear potential for oil price increases. Scenario 1 involves only a sustained halt to Iranian exports, reducing supply by about 1.5 million barrels per day, potentially driving a short-term price increase of around 10%. Scenario 2, a 25% reduction in Strait traffic creating a deficit of roughly 5 million barrels per day, could lead to a 20% price rise, similar to the spike following production cuts in September 2019. Scenario 3, a 50% reduction in Strait flow corresponding to a supply cut of about 10 million barrels per day, could see prices double in the short term. Scenario 4, a complete closure causing a supply disruption of approximately 20 million barrels per day, could lead to uncontrollable price surges, conservatively estimated above 300%, though this is considered a low-probability event.
Cushioning variables include OPEC's spare capacity and the supply-demand gap. OPEC's spare capacity is near 4 million barrels per day, and following the attacks on Iran, OPEC has indicated readiness to increase crude output, a key reason price curves still point towards a "short shock."
The first layer of transmission involves oil prices pushing up inflation, with lagged effects being more critical. Research estimates that a 10% oil price increase has little direct immediate impact on U.S. core CPI but accumulates over the subsequent 4 to 8 quarters, ultimately raising it by 0.1 to 0.3 percentage points. Using a median elasticity of 0.2, Scenario 1's 10% price rise would correspond to a 0.2 percentage point increase in U.S. core CPI during the lag period. Scenario 2's 20% rise could add about 0.4 percentage points, enough to warrant monetary policy vigilance against re-inflation. A linear extrapolation for Scenario 3's price doubling suggests a theoretical core CPI rise of about 2.0 percentage points, signaling significant secondary inflation risks. Under Scenario 4, a price surge exceeding 300% could theoretically add up to 6.0 percentage points, risking unanchored inflation expectations.
The second transmission layer involves a potential reversal of Federal Reserve rate cut expectations, with the Yen carry trade as a potential flashpoint. Rising inflation would reshape the Fed's policy path. Based on a policy rule, implied policy rates under the four scenarios are approximately 4.4%, 4.7%, 7.1%, and 13.1% respectively, suggesting that oil price increases could cool or even reverse expectations for rate cuts.
Another risk lies with Japan. Approximately 72% of Japan's crude imports are highly dependent on the Strait of Hormuz, making import prices sensitive to oil volatility. Historically, Japan's import price index leads core CPI by about six months; imported inflation could pressure the Bank of Japan to hike rates rapidly. If the pace of hikes accelerates, narrowing the US-Japan interest rate differential would trigger repatriation and unwinding of Yen carry trades, amplifying global liquidity volatility. This "crude supply disruption -> global carry trade reversal" chain is seen as critical, potentially magnifying volatility in risk assets.
The third transmission layer involves realignment across shipping rates, metals, and chemical supply chains. Rising energy costs will create significant divergence within global supply chains, presenting structural investment opportunities and risks.
Beneficiary sectors include oil tanker shipping. Constraints on Strait transit are expected to lift freight rates, particularly for VLCCs. On the demand side, Asian buyers shifting to sources in the Atlantic basin would lengthen routes and tie up vessel capacity. On the supply side, Persian Gulf scheduling difficulties and rising insurance premiums would add pressure.
Another beneficiary is electrolytic aluminum. Reports suggest infrastructure damage could reduce global primary aluminum supply by nearly 600,000 tons annually, with restart difficulties amplifying disruptions. Overall, Gulf countries' total aluminum production reached 6.87 million tons in 2024, accounting for roughly 10% of global capacity. Any military action against Iran could have spillover effects, impacting production and transport across the Persian Gulf aluminum industry.
A third beneficiary is chemicals. Iran is the world's second-largest methanol producer after China, accounting for about 20% of global methanol trade in 2023 and approximately 55% of China's methanol imports. Iran is also a significant exporter of polyethylene and urea, with annual urea capacity of 8-9 million tons, representing about 12% of global trade.
Sectors facing pressure include energy-intensive industries. For ceramics/glass, base metal products, and certain chemicals, electricity costs can account for over 5% of expenses, making these industries vulnerable to rising energy prices. Meanwhile, it's noted that China's energy self-sufficiency rate is approximately 85%, providing a partial buffer against external shocks.
Regarding market pricing and tail risks, while the probability of extreme scenarios is considered low, the prospect of prolonged disruption warrants closer monitoring. The futures curve appears to price in Iranian supply disruptions but not a full Strait closure. Recent movements in equities, bonds, currencies, and gold have begun reflecting concerns about prolonged instability, shifting focus to whether oil prices might again elevate the global inflation trend.
The prevailing view leans towards a low probability of a sustained, full-scale closure. Oil revenues constitute over half of Iran's foreign exchange income, and reports indicate Iran's food self-sufficiency is around 60%, implying reliance on imports. A long-term blockade would exacerbate foreign exchange shortages and impact living standards, testing Iran's endurance.
Another constraint stems from the US interest in oil price stability. A significant inflation resurgence could potentially halt the US technology cycle and hinder supply chain restructuring efforts. For investors, a key variable is whether the window of global liquidity volatility triggered by rising inflation becomes extended.
