Dire Strait

Trump is holding a gun to Iran’s head, but also holding open a door. Oil prices are high, not as high as they were in 2022 when Russia invaded Ukraine. Then there was the prospect that sanctions would eliminate forever access to the products of the world’s second largest petroleum exporter, but sanctions were not enforced against China or India. Today’s crisis is a simple chock-point problem, in which the Strait of Hormuz could be reopened instantly with diplomatic solution. This is what markets are expecting, and it’s the base case – but if it turns out otherwise, markets are unprepared. About half the volumes normally coming through the Strait have been diverted, so the shortages are not as bad as they seem. Strategic petroleum stockpiles are the highest since the pandemic. China and other Asian nations, most dependent on the Strait, have several months of supply. Refined product markets are the hardest hit, and prices there will recover more slowly when the crisis ends.