Why all eyes are on the Strait of Hormuz, a 90-mile strip critical to global oil prices
Global investors are on alert about a 90-mile sea passage in the Middle East, fearing that any block of the Strait of Hormuz could derail global shipping and oil.
Tensions in the Middle East escalated sharply after the US struck Iran's nuclear facilities on Sunday, prompting fears of retaliation from Tehran. Beyond concerns about defense and security, markets are concerned about the fallout for oil prices and the global economy should Iran block shipping in the Strait of Hormuz — a threat Tehran has repeated for years.
"If Iran chooses to blockade the Strait of Hormuz, it'd be categorically negative," Kyle Rodda, a senior financial markets analyst at Capital.com, told Business Insider.
"In the worst-case scenario, it would be incredibly impactful: higher fuel prices, higher inflation, slower growth, and interest rates higher than where they'd otherwise be," Rodda said.
What is the Strait of Hormuz?
One of the most geopolitically sensitive maritime routes, the Strait of Hormuz is just 21 miles across at its narrowest point. It connects the Persian Gulf to the Indian Ocean, with Iran to its north and the United Arab Emirates and Oman to its south.
According to the US's Energy Information Administration, the Hormuz is one of the world's busiest shipping lanes, carrying about 20 million barrels of oil a day.
Most energy shipments through the Strait of Hormuz have no other means of exiting the Persian Gulf, the starting sea point for major oil producers like Saudi Arabia to export their energy to the rest of the world.
How much shipping goes through the Strait of Hormuz?
About a quarter of seaborne oil and a fifth of global liquified natural gas trade moves through the Hormuz, so any disruption to shipping would hit the energy markets hard.
"The bombing of Iranian nuclear facilities by the US over the weekend increased supply risks significantly for the oil and LNG market," wrote Warren Patterson, the head of commodities strategy at ING, on Monday.
Can Iran really close the Strait?
Iran doesn't have the legal authority to shut down marine traffic in the Hormuz. But it could disrupt the movement of vessels by other means, for example by damaging oil and shipping infrastructure.
On Sunday, the Iranian parliament voted to close the Strait of Hormuz in retaliation against the US's action. The final decision still lies with the country's top security officials, according to Iran's state-owned Press TV.
Analysts said they think an Iranian blockade is probably more about political posturing than real action.
"While the headlines sound dramatic, the reality is that Iran's parliament holds no executive power over military or strategic decisions, particularly not ones with such far-reaching geopolitical and economic consequences," Dilin Wu, a research strategist at Pepperstone, told BI.
"Iran is well aware that any direct disruption to global oil flows through the Strait would likely trigger a significant military and economic response, possibly escalating the conflict beyond its control," she added.
Would the US be affected by a blockade?
The US is an energy giant and has become a net energy exporter since 2019, so it's less prone to physical supply shock from a blockade of the Hormuz.
However, the US could still be hit by the fallout from worsening global economic conditions.
"Any negative impact would be through deteriorating financial conditions or through higher for longer rates as the Fed has another reason to delay cuts," Deutsche Bank analysts said in a Monday note.
What about other countries?
Asian countries would be the most affected by a blockade of the Hormuz, said Priyanka Sachdeva, a senior analyst at brokerage Phillip Nova.
In 2024, over 80% of crude oil, condensates, and LNG that moved through the Hormuz headed to Asia, according to the EIA.
"Asia, which consumes the lion's share of Middle Eastern oil, would be most vulnerable, with India, Japan, South Korea, and China facing logistical uncertainties and costlier re-routing," said Sachdeva.
South European countries dependent on Gulf oil could also face higher import costs, although Saudi Arabia and the UAE can reroute significant volumes of such exports via pipelines and via a pipeline and the UAE port of Fujairah.
What would a closure mean for gas prices and inflation?
Energy is a key input cost, so any gains in oil prices are likely to drive up inflation broadly.
The US's strike on Iran sent oil futures up to a five-month high late on Sunday. Oil prices are now up about 10% since Israel's strikes on Iran in June.
These developments are taking place amid the summer driving season, when US gas demand peaks. Should the gains in oil prices be sustained, pump prices are likely to rise in the weeks ahead.
According to the EIA, the price of gas typically rises by 2.4 cents per gallon when crude oil prices rise by $1. This translates into a gain of about 20 cents per gallon at current levels for oil futures.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Chicago Tribune
18 minutes ago
- Chicago Tribune
Oil flip-flops and shares are mixed after the US strikes Iranian nuclear sites
BANGKOK — Global markets appeared to take the U.S. strike against nuclear targets in Iran in stride as investors watched Monday to see how Iran will react. The price of oil initially jumped more than 2%, fell and then regained about half that much. U.S. stock futures edged lower and share benchmarks in Europe and Asia also were mostly lower. The attacks on three Iranian sites raised the stakes in the war between Israel and Iran and left questions about what remains of Tehran's nuclear program. It also increased the possibility that Iran might retaliate, potentially disrupting shipping through the narrow Strait of Hormuz, a waterway through which much of the world's crude oil passes. The big unknown is what Iran will do, analysts said. The price of Brent crude oil, the international standard, was up 1.2% at $77.91 per barrel. U.S. benchmark crude climbed 1.3% to $74.79. The future for the S&P 500 was little changed, while that for the Dow Jones Industrial Average was down 0.1%. Treasury yields were steady. In Europe, Germany's DAX lost 0.5% to 23,230.54 and the CAC 40 in Paris fell 0.6% to 7,541.25. Britain's FTSE 100 shed 0.2% to 8,761.53. Overall, there was no sign of panic. 'I believe what we are thinking is or the thinking is that it is going to be a short conflict. The one big hit by the Americans will be effective and then we'll get back to sort of business as usual, in which case there is no need for an immediate, panicky type of reaction,' said Neil Newman, managing director of Atris Advisory Japan. The conflict began with an Israeli attack against Iran on June 13 that sent oil prices yo-yoing and rattled other markets. Closing off the Strait of Hormuz would be technically difficult but it could severely disrupt transit through it, sending insurance rates spiking and making shippers nervous to move without U.S. Navy escorts. As a major oil producer, Iran may be reluctant to close down the waterway, which is used to transport its own crude, mostly to China. Oil is a major revenue source for the regime. 'The situation remains highly fluid, and much hinges on whether Tehran opts for a restrained reaction or a more aggressive course of action,' Kristian Kerr, head of macro strategy at LPL Financial in Charlotte, North Carolina, said in a commentary. Speaking to Fox News on Sunday, U.S. Secretary of State Marco Rubio said disrupting traffic through the strait would be 'economic suicide' and would elicit a U.S. response. 'I would encourage the Chinese government in Beijing to call them about that because they heavily depend on the Strait of Hormuz for their oil,' Rubio said. When asked about that at a routine briefing in Beijing, Chinese Foreign Ministry spokesperson Guo Jiakun told reporters in Beijing that 'China is willing to strengthen communication with Iran and relevant parties to continue playing a constructive role in promoting de-escalation' of the conflict. 'The Persian Gulf and its adjacent waters are important international channels for cargo and energy trade. Maintaining security and stability in this region serves the common interests of the international community,' he said. Tom Kloza, chief market analyst at Turner Mason & Co said he expects Iranian leaders to refrain from drastic measures and oil futures to ease back after the initial fears blow over. Disrupting shipping would be ' a scorched earth possibility, a Sherman-burning-Atlanta move,' Kloza said. Writing in a report, Ed Yardeni, a long-time analyst, agreed that Tehran leaders would likely hold back. 'They aren't crazy,' he wrote in a note to investors Sunday. 'The price of oil should fall and stock markets around the world should climb higher.' Other experts weren't so sure. Countries are not always rational actors and Tehran could lash out for political or emotional reasons, said Andy Lipow, a Houston analyst who has covered oil markets for 45 years. 'If the Strait of Hormuz was completely shut down, oil prices would rise to $120 to $130 a barrel,' Lipow said. That would translate to about $4.50 a gallon at the pump and hurt consumers in other ways, he said. Much of East Asia depends on oil imported through the strait. Taiwan's Taiex fell 1.4% while the Kospi in South Korea slipped 0.2%. In Tokyo, the Nikkei 225 edged 0.1% lower, with gains for defense contractors, oil companies and miners helping to make up for broad losses. 'The U.S. strike on Iran certainly is very good for defense equipment,' Newman of Atris Advisory said, noting that both Japan and South Korea have sizable military manufacturing hubs. Australia's S&P/ASX fell 0.4%. Hong Kong's Hang Seng regained lost ground, climbing 0.7%, while the Shanghai Composite index picked up 0.7%. In currency dealings, the U.S. dollar rose to 147.82 Japanese yen from 146.66 yen. The euro fell to $1.1464 from $1.1473.
UPI
28 minutes ago
- UPI
Britain, U.S. warn Iran against Strait of Hormuz blockade
U.S. Secretary of State Marco Rubio (R) and Britain's Foreign Secretary David Lammy (L) at a meeting at NATO Headquarters in Brussels in April. File Photo by NATO/UPI | License Photo June 23 (UPI) -- Britain cautioned Iran Monday that attempts to block the Strait of Hormuz or to strike at American military facilities in the Middle East could lead to escalation, even as Israel continued its strikes on Iran. British Foreign Secretary David Lammy said Monday that such actions would be a "catastrophic mistake." "It would be a huge, catastrophic mistake to fire at U.S. bases in the region at this time. We have forces in the region at this time," said Lammy in an interview with BBC Breakfast. The Iranian parliament moved Sunday to approve a measure to close the Strait in response to the American strikes on Iran over the weekend. The strait serves as a critical route for oil being shipped from Persian Gulf countries, but ultimately it will come down to whether Iran's Supreme Leader Ayatollah Ali Khamenei decides to move forward with such a plan. Close to 30% of the world's seaborne oil shipments are moved through the strait. U.S. Secretary of State Marco Rubio also commented Sunday against Iranian interference with movement through the strait. He spoke with Fox News and called on China to prevent Iran from closing the Strait of Hormuz. "I encourage the Chinese government in Beijing to call them about that, because they heavily depend on the Straits of Hormuz for their oil," said Rubio, as China is a key oil customer of Iran. "The Persian Gulf and nearby waters are important route for international trade in goods and energy. Keeping the region safe and stable serves the common interests of the international community," Chinese Foreign Ministry Spokesperson Guo Jiakun said in a press conference Monday. "China calls on the international community to step up effort to promote de-escalation of the conflict and prevent the regional turmoil from having a greater impact on global economic growth." Meanwhile, Israel Defense Forces announced Monday on social media that it "struck routes in order to obstruct access" to the Fordow nuclear enrichment site in Iran's Qom province. The IDF also proclaimed it attacked six Iranian airports "across western, central, and eastern Iran, destroying runways, underground hangars, refueling aircraft, F-14, F-5 and AH-1 aircraft." It further alleged the strikes "impaired takeoff capabilities from these airports, as well as the Iranian military's ability to operate its air force from them."
Newsweek
44 minutes ago
- Newsweek
New Cameras Predict if Somebody Is About to Shoplift, Company Says
Based on facts, either observed and verified firsthand by the reporter, or reported and verified from knowledgeable sources. Newsweek AI is in beta. Translations may contain inaccuracies—please refer to the original content. A new form of security camera software that uses artificial intelligence to predict if someone may be about to shoplift is being used in certain stores in the U.S. The camera software, produced by AI surveillance company Veesion, reads body language and hand movement to detect suspicious behavior, allowing shops to prevent robberies before they happen, per the company. Newsweek contacted Veesion for more information on the technology via email. Why It Matters In 2024, there was a rise in shoplifting reports, with the Council on Criminal Justice reporting that the crime increased by 24 percent in the first half of the year compared to the same time period the previous year. Retailers have sought to prevent theft without compromising the customer experience as traditional approaches such as locking up products can frustrate shoppers and have been found to lower sales. What To Know Veesion's system plugs into a store's existing camera network. The software analyzes video feeds and flags sequences it considers suspicious. These alerts appear on staff tablets, phones or even checkout terminals. The technology is currently on trial at around 5,000 stores in the U.S, Canada and Europe. Veesion, which was founded in France in 2018, says its software avoids identifying individuals or collecting biometric data. "Our technology does not allow for the recognition of physical or physiological characteristics, the deduction of emotions or intentions of people," Veesion states on its website. Examples of an AI-powered shoplifting detection software produced by Veesion. Examples of an AI-powered shoplifting detection software produced by Veesion. Veesion Its creators also say that the technology can avoid the biases of other AI-based products, as it doesn't read anything else about the person it is observing, just their body language. "The algorithm doesn't care about what people look like. It just cares about how your body parts move over time," Veesion cofounder Benoît Koenig told Business Insider. In stores, the software works by comparing live footage to millions of examples of shoplifting gestures that the algorithm has been trained on. Over time, the system improves via machine learning, with the stated goal of reaching 99 percent detection rates. Koenig told Business Insider more than 85 percent of alerts have been considered relevant for store operators that use the Veesion system. He said one client in the U.S. was able to halve losses in one section of the store in the first three months of implementation. Retailers also benefit, in theory, from a deterrence created by the strength of the technology. "They know there is an AI in the cameras, so they're going to be careful with what they do," said Koenig. What People Are Saying Veesion cofounder Benoît Koenig told Business Insider: "It's not glamorous, but the ROI is quite direct. You're going to arrest shoplifters, recover inventory, and save money." Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, told Newsweek: "Shoplifting as such a widespread crime during a time of high inflation is actually quite common when you look at similar times from other countries in the past. "The one-two punch that consumers face is not just higher prices, but also a drawback of additional financial resources they would normally qualify for because of their current employment and income outlook." What's Next Veesion, which recently raised $43 million in funding, is expanding its U.S. operations.
