The Gulf Conflict and the Return of $100 Oil

The conflict in the Gulf has introduced significant volatility into global energy markets. Prices are reacting sharply to the news cycle, oscillating between fears of supply disruption and hopes for a resolution.

When crude oil breached the psychological US$100-per-barrel mark earlier in the week, it served as a stress test for market sentiment. However, the speed of the subsequent pullback reinforces our view that prices are currently being driven by a geopolitical risk premium and insurance bottlenecks, rather than a structural lack of physical supply.

The Strait of Hormuz and the future of global energy security

It has also revealed how the closure of the Strait of Hormuz has inadvertently handed Iran significant leverage over the global economy and revived difficult questions about the future of global energy security. Structurally, inventory buffers will likely have to go higher globally to account for this rising geopolitical premium.

Paradoxically, while this supports fossil fuel demand in the short term, it may hasten the switch away from it in the long term. Buyers seeking more secure forms of power are likely to accelerate the transition to potential structural winners like nuclear, coal and clean energy.

Traffic in the Strait has effectively gone to zero, but there is no evidence yet that it has been physically mined. The closure is more financial and logistical. Commercial insurers are refusing coverage for vessels transiting the Strait and talk of the US providing US$20 billion of coverage (via Development Finance Corp) is seen as inadequate, with tangible naval escorts yet to materialise.

There are few viable workarounds to the Strait. Pipelines in Saudi Arabia and the UAE offer one route, but their capacity is limited. We are even seeing Russian sanctioned volumes starting to flow and Venezuelan supply beginning to reflect easing US sanctions, but these are imperfect offsets. Asia can source some ‘sour’ crude from North America, but the transit time is almost double which adds friction to the entire system.

The more hidden inflation inputs

The Strait is also the primary transit route for non-energy commodities such as:

• Fertiliser: the Middle East is a significant exporter of fertilisers, particularly urea. The impact would likely fuel food inflation
• Sulphuric acid: the Middle East is a significant producer of sour crude and sulphur, which is used to manufacture sulphuric acid, a key input in the production of copper and various other metals
• Basic chemicals like propylene/polypropylene can cause inflation in various medical and packaging supply chains
• Metals like aluminum are further impacted as the Middle East is a meaningful producer due to cheap power sources
• Other: Chlorine/caustic soda (water treatment), soda ash (glass), various high purity gas and chemicals (semiconductors and electronics) and helium (various industrial uses)

Figure 1. Share of global seaborne commodity flows across the Strait of Hormuz in 2024 (imports and exports)

Source:  Kpler as at end 2024.

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Parting thoughts

The conflict has escalated far beyond what many anticipated at the start of the conflict. Markets have moved from an initial shock response to concerns about the wider impact on the global economy.  While we can outline some of the key dynamics at play, with events on the ground unfolding so rapidly, it is difficult and probably imprudent to make any firm predictions about the next phase.
 

All data Bloomberg unless otherwise stated.

Author: Al Chu, a Natural Resources Portfolio Manager at Man Group