Dozens of merchant vessels are now transiting the Strait of Hormuz following a surprise US-Iran agreement, triggering a cautious response from the British Navy. The deal, details of which remain sketchy, appears to have temporarily de-escalated tensions in the world’s most critical oil chokepoint. But for investors and traders, the question is not about diplomacy: it is about the cost of insurance, the price of crude, and the reliability of supply chains.
The Strait of Hormuz handles roughly 20% of global oil shipments. Any disruption here sends shockwaves through futures markets. Yesterday, Brent crude spiked 9% on false rumours of a mine strike; today, it has dropped 4% on this news.
Volatility, ladies and gentlemen, is the only constant. The Royal Navy has put its destroyers on standby, but the real action is in the tanker market. War risk premiums for vessels entering the Gulf have fallen by half since the announcement, but they remain well above pre-crisis levels.
This suggests the market is pricing in a high probability of future disruption. The deal is fragile; the history of US-Iran negotiations is littered with broken promises. The fiscal hawks in Whitehall will be watching the impact on gilt yields.
A stable Hormuz means lower energy costs, which takes pressure off the Bank of England to hike rates. But do not mistake a temporary reprieve for a permanent peace. The underlying drivers of instability remain: Iran’s economy is crippled by sanctions, and the US faces an election cycle that makes long-term commitments difficult.
For the City, the bottom line is clear: hedge your positions, diversify your supply, and do not bet on the Strait staying open forever.
