Authored by Norbert Rücker, Head of Economics and Next Generation Research, Julius Baer

The twists and turns continue. The United States called off the safeguarding of trade through Hormuz again, keeping uncertainty high, and transits are down to a trickle for the time being.

Oil prices dropped below USD 110 despite the persistent gridlock, possibly for the simple fact that these latest twists triggered some hostilities but not a pronounced escalation. Politics aside, the oil market has moved past the initial shock reaction and has settled in a regime of deficit absorption by inventory draws.

There is breathing room to deal with the supply shock beyond summer. Our views are unchanged; the current crisis should follow the historic pattern of a short-lived but intense price shock.

Looking much further ahead, some years from now, the Strait of Hormuz very likely will have lost some of its strategic importance and economic threat, given the lasting shifts that already occurred in response to the conflict.

Despite more than a month of ceasefire, trade through Hormuz remains down to a trickle. The back and forth of the US actions, combined with the Iranian regime’s aggressive seizure of control keep the uncertainty and risks high. Just as shippers were assessing the impacts of the so-called ‘Project Freedom’, the US-safeguarding of trade, these measures were called off again.

Oil prices dropped below USD 110 despite the persistent gridlock, possibly for the simple fact that these latest twists so far have triggered some hostilities but not a pronounced escalation of military actions. The coming days will show, if the US interference brings more traffic into the Southern corridor, alongside the so far dominant and Iran-controlled transits via the Northern corridor.

The near future could also see shifts in dynamics on the back of more diplomatic engagement by other countries with Iran. Politics aside, the oil market has moved past the initial shock reaction and has settled in a regime of deficit absorption by inventory draws. The transition into the next regime, one where high prices and substantial demand destruction safeguard supplies, remains a threat on the horizon past summer. Strategic and commercial storage plugs the demand-supply gap for the time being, well visible in the inventory draws reported from North America, Europe and Asia. Thanks to the largely concluded trade re-routing, incentivized by at times wide price differentials, regional oil product supplies should not become critical for the time being. Trade should even out the storage draws across all oil and oil product sub-markets.

Alongside the alternative routes out of the Middle East, there are various small elements that overall bolster the market’s temporary resilience: South America’s crude oil boom, including a bounce in Venezuelan exports, North America’s ample jet fuel and natural gas liquids supplies, or China’s petrochemical feedstock flexibility.

So far, there are no meaningful trade restrictions, and this sanguine political reaction to the crisis helps tremendously in dealing with it. While a supply response by the US shale business still is unclear, we do not see today’s conflict nourishing a lasting oil investment boom and shift in the oil business cycle. That said, some lasting shifts have become visible: peak oil demand moves closer as road electrification accelerates, for autos and trucks, the United Arab Emirates leave the oil cartel, and Iraq builds a pipeline to boost exports into the Mediterranean.

Some years from now, the Strait of Hormuz very likely will have lost some of its strategic importance and economic threat. Our views are unchanged; the current crisis should follow the historic pattern of a short-lived but intense price shock. We see oil trading meaningfully lower later this year.

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