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The United States and Israel launched military action against Iran on Saturday, February 28, restricting supplies of oil, natural gas and urea fertilizers that normally pass through the Strait of Hormuz, with a major impact on global financial markets. The data are now well known, and the prevailing view tends to be that the future reopening of the Channel (and the certainty that this crisis will end with the end of all previous geopolitical crises) will immediately lead to an end to macroeconomic stress.
But reality is more complicated than that, as pressing the (on/off) button is not enough to restart oil and gas production systems in the Persian Gulf region. Currently, about 50% of the region’s energy capacity has ceased, and export flows are no more than 30% of pre-February 28 levels.
Let’s review the key fundamental factors:
• 25% of global crude oil exports pass through the Strait of Hormuz
Accounts for 20% of global LNG exports
Accounts for 35% of global urea fertilizer exports
• Most of these exports go to Asia (80%), the center of global economic growth
The reopening of the Strait of Hormuz is undoubtedly good news geopolitically and economically. This will be the first step in returning to the pre-February 28 situation, but the process of returning to normal will only take a few days. Instead, it will take several weeks for full normalization of:
• The entire oil and gas production system in the Persian Gulf may take weeks to fully restart shut down facilities
• It will take weeks to reorganize and resume maritime traffic via VLCCs, the London-based International Maritime Organization (IMO) confirmed.
• Global inventories will continue to decline during this period and will need to be rebuilt
• In a few weeks, global energy production and transmission systems will be back to work, but geopolitical risk premiums and tanker insurance premiums will remain much higher than they were before February 28.
The table below shows current and future oil, gas and urea supply constraints.
Therefore, it may take time, perhaps weeks, for oil and gas prices to return to normal levels in financial markets, with an upward impact on global nominal inflation rates. The reaction of major central banks remains unknown, but we must remember that the first day of reopening the Strait of Hormuz will not immediately end the economic crisis.
The image below shows the movement of oil tankers through the Strait of Hormuz (Source: MarineTraffic)
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