Crisis in the Strait of Hormuz: Week Four

The conflict involving the United States, Israel, and Iran has entered its fourth week, centered on control of the Strait of Hormuz. Key developments include a US ultimatum to Iran to reopen the waterway, retaliatory threats from Iranian officials, fluctuations in global oil prices, and ongoing diplomatic contacts.

Timeline and Key Events

The conflict began on February 28, with US and Israeli military operations against Iran. The Strait of Hormuz, a waterway through which approximately 20% of the world's oil and liquefied natural gas supply transits, has been largely inaccessible since that date, though some vessels from specific countries have reportedly managed passage.

"Sometimes you have to escalate to de-escalate." — Treasury Secretary Scott Bessent

On Saturday, US President Donald Trump issued a 48-hour deadline on his Truth Social platform, demanding that Iran "fully open, without threat" the Strait of Hormuz. Trump stated that if the demand was not met, the US would target Iranian power plants, beginning with the largest one.

Iran responded by stating it would "completely" close the Strait of Hormuz if its power facilities were attacked, according to state TV reports. Iranian Parliament speaker Mohammad Bagher Ghalibaf declared that any attacks on Iran's power plants would be met with immediate retaliatory strikes on energy and oil infrastructure across the region, stating that "critical infrastructure and energy and oil infrastructure throughout the region will be considered legitimate targets and irreversibly destroyed." Ghalibaf later expanded this threat to include financial entities that purchase US government bonds. A senior Iranian official added on social media that the headquarters and assets of financial entities buying US Treasury bonds are considered "legitimate targets."

The Israel Defense Forces (IDF) initiated strikes on infrastructure in Tehran on Monday, as per an IDF Telegram post, without providing specific details on the targets. Defense Minister Israel Katz had previously stated that the intensity of IDF and US military attacks on Iran and its infrastructure was expected to "increase significantly" in the coming week.

The US accelerated the deployment of Marines and amphibious assault ships to the Middle East. Treasury Secretary Scott Bessent, questioned on NBC News' "Meet the Press," stated that scaling back and escalating were "not mutually exclusive," adding that "Sometimes you have to escalate to de-escalate." He declined to provide details on potential US military actions, including using troops to secure the Strait of Hormuz, and warned that "all options" remained available to secure Kharg Island, including troop deployment.

Separately, reports indicated Iran-backed Houthi militants launched ballistic missiles at Israel.

Diplomatic Engagement

Trump informed reporters in West Palm Beach, Florida, that Iran initiated contact with the US seeking a diplomatic resolution to the conflict. He stated that Iran had accepted most of a 15-point plan proposed by the US to end the conflict, though Iran has not publicly confirmed this. Trump stated, "There's got to be a good deal, and it's got to be no more wars, no more nuclear weapons. They're not going to have nuclear weapons anymore."

"There's got to be a good deal, and it's got to be no more wars, no more nuclear weapons." — President Donald Trump

Discussions reportedly covered 15 points, including preventing Iran from acquiring nuclear weapons. Iran maintains its nuclear program is for civilian purposes and denies seeking nuclear weapons. Special envoy Steve Witkoff and Jared Kushner are reportedly leading these talks for the US.

Separately, Trump informed the Financial Times that an Iran deal could be achieved "fairly quickly" and expressed a desire to "take the oil in Iran." He also stated that 20 boatloads of oil, in addition to 10 from the previous week, would pass through the Strait of Hormuz starting Monday as a "sign of respect."

Oil and Gas Market Developments

Oil prices have fluctuated throughout the conflict. Prior to February 28, the price of oil was approximately $70 per barrel. Global benchmark Brent crude has increased by over 50% since late February.

Recent Price Movements

Analysis of Market Factors

According to a Goldman Sachs analysis, three factors explain relative stability below some worst-case predictions: a lower risk premium, destocking, and moderation in spot buying.

• Investor expectations of resolution: Market sentiment turned on April 7 when President Trump announced a temporary US-Iran ceasefire. Tom Graff of Facet stated oil prices likely peaked. Energy analyst Neal Dingmann noted that exploration and production companies are not adding rigs, indicating they expect disruption to last only a few months.
• Prewar oil stockpiles: Vikas Dwivedi of Macquarie Group said the global market was in surplus before the conflict. The global economy is less oil-dependent than historically.
• Moderation in spot buying: Dwivedi noted that the conflict overlaps with refinery maintenance season, reducing urgency. Demand destruction may be occurring in some Asian markets reliant on Middle East oil.

Chris Verrone, chief market strategist at Strategas Research, suggested that the widening gap between Brent and WTI might indicate a "peak intensity" for the current oil crisis but noted that sustained high Brent crude prices are likely to lead traders to anticipate a longer-term conflict.

Marko Papic, chief strategist at BCA Research, suggested that markets might not await a clear resolution for prices to stabilize, potentially desensitizing to ongoing risks. He proposed that the coming month might see a transition to a "new kinetic equilibrium."

Economic Impacts and Warnings

International Energy Agency Executive Director Fatih Birol warned of a severe global energy crisis attributed to the situation in the Strait of Hormuz.

Gasoline Prices

• The national average price of gasoline in the US reached $3.98 per gallon on Sunday, according to AAA — the highest level since summer 2022.
• The price has increased by 93 cents per gallon since the conflict began.
• Patrick De Haan, chief analyst at Gas Buddy, estimated that US drivers have collectively spent an additional $10 billion on gasoline since the conflict began.

Broader Economic Effects

• Increases in grocery and jet fuel prices have been observed, with jet fuel reaching $195 by the end of March.
• Rising jet fuel costs and shortages have led some airlines to implement additional charges for travelers or cancel flights.
• The ongoing conflict, combined with existing tariff policies, has contributed to an increase in the cost of various goods in the US.
• The conflict has also affected the supply of other essential materials and commodities, including helium, pharmaceuticals, and fertilizer.
• A Bloomberg News report indicated that US government officials and Wall Street analysts are considering the potential for oil prices to surge to $200 per barrel.

Market Reactions

Asia-Pacific markets experienced a decline on Monday, with major indexes in Japan and South Korea falling over 5%. The three major US stock indexes experienced advanced trades down by as much as 0.5% on Sunday evening.

Analysts caution that a future price spike to triple digits remains possible if the war escalates unexpectedly. Chris Weston, head of research at Pepperstone, noted that the outcome of developments and any subsequent actions by President Trump would have significant implications for markets during the week. Weston indicated that while Trump has demonstrated instances of de-escalation, he has also shown a willingness to proceed with military action when demands are not met.