Key Points:
- Oil and natural gas prices surged after the US announced a blockade of the Strait of Hormuz.
- The blockade follows failed talks between the US and Iran, escalating the energy crisis.
- The Strait of Hormuz has been largely disrupted since late February, with Iran imposing fees.
- Concerns rise over potential US-China tensions and further disruptions in the Red Sea.
Oil and natural gas prices shot up as the US moved to blockade the Strait of Hormuz after weekend talks between Washington and Tehran failed to reach a deal. This action escalates a global energy crisis that has already shaken markets.
Brent crude rallied by as much as 9.1% to nearly $104 a barrel, while European gas futures spiked almost 18% at one point. The US Central Command announced that US forces would start implementing the blockade, which applies to all ships entering or leaving Iranian ports, from 10 a.m. New York time Monday.
The war in the Middle East has turned global energy markets upside down, with higher prices threatening to fuel inflation while slowing economic growth. Refiners and traders worldwide are now desperately scrambling for immediate crude oil shipments as physical supplies become tighter.
President Donald Trump told reporters that the blockade would be very effective. He had earlier threatened to retaliate if Tehran resisted. In addition to the blockade, the Wall Street Journal reported that the US leader and his advisors were considering resuming limited strikes.
“This injects an enormous amount of extra risk,” said Michael Ratney, former US ambassador to Saudi Arabia, speaking to Bloomberg TV. He questioned, with some ships carrying oil destined for China, “is the US Navy going to blockade those, and thus create a crisis in US-Chinese relations?”
The Strait of Hormuz, which connects the Persian Gulf to global markets, has been effectively closed since US and Israeli strikes on Iran began in late February. Tehran has frustrated the White House by tightening its control over the route, imposing fees on some vessels, and keeping traffic at a fraction of pre-war levels.
Iran was still shipping crude oil and condensate out of the Persian Gulf in March, with China being the top destination, although flows were lower than the previous month, according to preliminary tracking estimates by Bloomberg.
“It seems to me that that is quite an ambitious effort, and it doesn’t solve the problem of disruption,” Mona Yacoubian, director of the Middle East Program at the Center for Strategic and International Studies, said about the US blockade plan. “It’s hard to make sense of it.”
If Iran felt its oil exports were threatened, it might push Houthi forces in Yemen to target transit through a choke point at Bab el-Mandeb, at the southern entrance to the Red Sea, Yacoubian noted. The Houthis joined the war in late March and have the ability to disrupt shipping.
Oil flows through the Red Sea have become more important since the war started. Saudi Arabia increased pipeline flows across the country to the port of Yanbu. On Sunday, Riyadh announced it had fully restored capacity through the East-West pipeline, as well as production from the Manifa field after Iranian strikes.
