Breakfast Bites - The Strait of Hormuz
Global Macro Data update; The Week Ahead
Rise and shine everyone.
We certainly had quite the eventful weekend. We’ve been hearing fighter jets here in the UAE as well. There’s not much of a threat of anything happening here, but the military remains vigilant.
Brent crude spiked over 5.5% at the open following US strikes on Iranian nuclear facilities, but later gave up about half those gains.
The US dollar opened stronger in Asia before easing slightly, while US equity futures initially dropped 0.7% to 1% but recovered most of the losses.
Gold rose 0.8% before slipping below Friday’s close. Bitcoin fell to $98K over the weekend, its lowest since early May, but bounced back above $101K.
Asian equities opened lower but clawed back much of their early declines.
Meanwhile, Saudi Arabia reported no radioactive traces detected locally or in neighboring Arab countries. It’s still unclear how severe the damage was, especially at Iran’s underground Fordow site. Iran downplayed the impact, while President Trump described the strikes as causing “monumental” damage and hinted at possible regime change.
Can the Strait of Hormuz be closed?
Iran's parliament approved the closure of the Strait of Hormuz - we highlighted last week that almost 20-22million barrels per day of oil and oil equivalents pass through the Strait. That's about 20-30% of the world's oil consumption.
While alternative routes exist, such as Saudi Arabia and the UAE’s combined pipeline capacity of up to 7 million bpd and Iran’s Jask line adding just 0.3 million bpd, these options together can only handle about one-third of the current maritime volume. As a result, there is no realistic bypass that can fully substitute for Hormuz
But we're doubtful that this strait can really be closed for an extended period of time because:
This cannot be a unilateral decision. Iran is to the north, but the UAE and Oman control the waters to the south.
Iran’s port here - Bandar Abbas - is a major port of access for the receipt of goods, food, and basic necessities.
Finally, this is also the access point for Iran’s oil exports, almost 90% of which is taken by China.
Trying to close the Strait may be a threat of aggression, but it’s not practical. This is possibly why we see the spike in Brent Crude Oil, already fading from the open.
However, the bigger issue remains costs and insurance coverage. This could very well be damaging enough to wreak havoc, even without a closure of the Strait.