The sun rises behind a tanker anchored in the Strait of Hormuz off the coast of Qeshm Island, Iran, on April 18.Asghar Besharati/The Associated Press
Crude oil fell in a highly volatile trading session that saw the price reach its highest level since 2022 in morning trading before sliding in the afternoon as buyers went missing. The wild session came as new economic figures showed that high prices are hurting growth, stoking inflation and possibly leading to interest-rate hikes.
Euro-zone inflation rose to 3 per cent in April, up from 2.6 per cent in March. The latest reading surpassed the 2.9-per-cent forecast by a Reuters poll of economists. April is the second consecutive month that inflation has exceeded the European Central Bank’s medium-term inflation target of 2 per cent.
The ECB on Thursday left its deposit rate unchanged at 2 per cent, but signalled it would consider a hike in June. “The upside risks to inflation and the downside risks to growth have intensified,” the ECB said in a statement.
Economists are taking the view that rate hikes are all but inevitable if the Strait of Hormuz remains closed, keeping oil prices well above US$100. “All of this means that unless there is a quick end to the war in the Middle East, headline inflation continues to increase and knock-on effects on transportation, food prices and other parts of the supply chain continue, the ECB is clearly moving toward a rate hike in June,” ING economist Carsten Brzeski said in a note.
With both the United States and Iran hardening their stances, any hope that Hormuz will reopen soon is vanishing, triggering concerns from some economists that the crippling cost for hydrocarbons could plunge the world into recession. Iran has said it will not reopen the strait until the U.S. ends its blockade on Iranian shipping.
In a defiant message on Thursday, Iran’s Supreme Leader, Mojtaba Khamenei, said that Tehran would secure the Persian Gulf region and stop what he called “the enemy’s abuses of the waterway.” He added that “Foreigners who maliciously covet [the strait] from thousands of kilometres away have no place there except at the bottom of its waters.”
In early London trading on Thursday, Brent crude, the international benchmark soared to US$126, taking the two-day price hike to 13 per cent before the late morning price reversal.
U.S. seeks help from allies to reopen Strait of Hormuz as crude prices surge
The fall came when traders closed their Brent June futures contract position amid low volumes. Brent finished at US$114, down 3.4 per cent from Wednesday. In spite of the decline, Brent is up more than 80 per cent in the past year.
Hormuz, through which 20 per cent of the world’s oil and liquefied natural gas (LNG) shipments pass, has been almost totally closed since Feb. 28, when the U.S. and Israel began their bombing campaign against Iran. The Islamic Republic in response mined the strait and attacked some ships, preventing all but a few tankers from reaching world markets.
Sporadic peace talks since then have gone nowhere. A ceasefire has been in place since April 8.
Axios reported late on Wednesday that U.S. Central Command has drawn up a plan for “short and powerful” strikes on Iran that could include infrastructure targets. Admiral Brad Cooper, head of Central Command, is due to brief U.S. President Donald Trump on Thursday, boosting speculation that attacks are imminent. Mr. Trump told Axios that he plans to keep the U.S. blockade of Iranian ports intact.
“Trump has ripped away the security blanket the market was clinging to – the hope that the war was about to end,” said Robert Rennie, head of commodity research at Westpac Banking Corp. “Traders are now being forced to confront a much uglier reality: Both sides still think they are winning, neither side has a clear incentive to negotiate, and energy prices are starting to accelerate higher.”
Hormuz’s shutdown removes about 20 million barrels a day of oil from the Persian Gulf. Some of the missing oil can be made up by higher production from other OPEC countries, inventory drawdowns and releases from government-controlled strategic petroleum reserves in the U.S. and elsewhere. But those efforts nowhere near cover the full loss, which is why prices have been rising.
In a new blog post, Oxford Economics said that oil prices could go to US$190 a barrel if Hormuz remained shut for six months. That price would surpass the all-time high of US$147 a barrel in 2008, just ahead of the global financial crisis.
Diesel and aviation fuel prices have climbed even faster. Many airlines are cutting back their flight schedules for fear of fuel shortages, raising ticket prices and adding fuel surcharges. In the U.S., diesel has climbed almost US$2 a gallon over its average price a year ago, according to the AAA Fuel Prices monitor.
Rising fuel prices are stoking inflation everywhere. U.S. annual inflation climbed to 3.3 per cent in March.
Economic expansion is also slowing. New figures show that euro-zone growth slowed to 0.1 per cent in the first quarter of the year following growth of 0.2 per cent in previous quarter. Germany’s growth remained intact but France was stagnant.
Since the first quarter included only one month of the war on Iran, economists are warning that the second-quarter figures could be weaker.
On April 20, economist Paul Krugman, a former New York Times columnist, said in his Substack, “In my view, a full-on global recession is more likely than not if the strait remains closed for, say, another three months, which seems all too possible.”
Hormuz’s shutdown is putting agriculture markets under stress. Between 20 per cent and 30 per cent of global fertilizer exports normally pass through the strait. Shortages of natural-gas-derived urea and ammonia are pushing prices up.
“Higher prices could reduce fertilizer use and lower crop yields if the disruption persists, posing significant food security risks,” the International Food Policy Research Institute said in an early April report. “Most vulnerable are countries heavily dependent on Persian Gulf fertilizer and natural gas, especially in Africa and South Asia.”