My Thoughts on the Oil Surge

What Happened

Global markets have been severely disrupted this week as crude oil prices surged following escalating conflict between the US, Israel, and Iran. The fighting left ships carrying roughly 20 million barrels of oil per day stranded in the Persian Gulf, with the Strait of Hormuz effectively closed to tanker traffic. Iran also struck Saudi Arabia’s largest domestic refinery, the US Embassy in Riyadh, and a major LNG facility in Qatar, taking roughly 20% of the world’s LNG supply offline. When markets opened the Sunday after initial strikes, prices briefly topped $80 a barrel before continuing to climb throughout the week.

Last night, Brent crude futures were trading above $119 per barrel, though prices have cooled today. At the time I’m writing this, it’s trading at around $100/barrel, up over 36% from the prior week. Some analysts warn prices could reach $150 a barrel by end of March if the Strait of Hormuz remains closed.

My Thoughts

The Strait of Hormuz oversees the flow of around 20% of the world’s oil. Shutting it down creates the potential for a substantial hit to oil supply across the world. As a result, crude futures spiked in anticipation of a supply shock; however, whether one comes is still not entirely clear. With US Navy intervention possible, escorts could keep the supply going. For now, this still leaves current traffic through the strait down over 80% and over 200 oil tankers stranded. Additionally, industries across the board could face elevated cost pressures if these conditions are sustained for more than 4-5 weeks (the rough timeframe after which oil spikes cause margin hits). These effects would be heavily magnified for most transportation industries, with the Dow Transportation Index down ~8% in the past 5 days. Moreover, if companies pass on these costs to consumers, we might see a jump in inflation outside of just prices at the pump. What that means for monetary policy is that, for now, the Fed’s hands are tied. Overall, there’s too much uncertainty about the future of the conflict to make clear judgments on what’s next. For now, the only thing we can expect with confidence is volatility in the markets.