Will the Strait of Ormuz be closed? The US attack on Iran threatens global oil supply

This is not an isolated action but is rather part of the escalation of tensions in recent weeks in the area, mainly between Israel and Iran. On June 13, Israel launched a military operation with massive bombardments of over 100 strategic objectives in Iranian territory, including nuclear facilities, Islamic Revolutionary Guard Corps (IRGC) command centers and missile tanks. 

The Iranian response was not what was expected: Iran retaliated with the launch of nearly 30 missiles into Israeli territory, in what it described as “a legitimate defense measure against coordinated US and Israeli attacks on its nuclear facilities.” US President Donald Trump soon reacted and announced that he would decide in the next two weeks whether to attack Iran or not. But it would only take two days. 

The bombardment of the three strategic nuclear facilities, which Trump has rated as a “total success”, has triggered alarm and put the Strait of Ormuz in the spotlight. Located between the Gulf of Oman and the Persian Gulf, the Strait of Ormuz transports 20% of the world’s oil, and closing it could lead to a sharp rise in the price of crude oil, which would mainly affect Europe and China.

For MAPFRE Gestión Patrimonial (MGP), the MAPFRE Group’s financial advisory area, last weekend’s attacks “will color the evolution of markets in the short-term,” and that the potential closure of the Strait of Ormuz would be “the worst response and greatest fear” for investors. 

Stock markets around the world closed down last week in recognition of the escalation of tensions in the Middle East, though the real point of concern is oil. The prices of both Brent crude oil and the US benchmark West Texas Intermediate (WTI) rose on news of the attack, before falling by around 5% as of Tuesday morning.

Price of Brent crude oil (barrel)

Source: MAPFRE Economics with Bloomberg data

Eduardo García Castro, expert economist at MAPFRE Economics, believes that there will be no complete interruption of the strait. “Oil exports have to pass through the strait – that’s where their revenue comes from,” he says. In addition, the United States, Russia and Saudi Arabia decided during the OPEC meeting to increase supply so the market “would be in a more comfortable situation”. Iran has a 10% market share, so this increase in supply would mitigate the country’s reduction.

There may be attacks on merchant fleets as retaliation. “It’s very likely that we’ll see specific problems. There’s always the option, as we’ve seen in other times of crisis, of modifying the route and passing through the Cape of Good Hope. Although piracy is an issue there, it’s easier to defend yourself against pirates than missiles,” he explains.

García Castro adds that the situation of Iran’s partners in the region doesn’t allow it to go much further either. “Russia isn’t in a strong military situation and North Korea won’t be able to provide the help it needs either. Furthermore, China is the main victim if the Strait  of Ormuz closes,” he said. 

The expert economist at MAPFRE Economics believes that this escalation of tension is another stagflationary shock, which involves lower growth and higher inflation, and hinders the work of central banks. MGP coincides: “This supply shock would be very difficult for central banks to combat, given that monetary policy has little effect on an economic scenario like this,” it points out in its weekly report.

This escalation in tensions in the Middle East is a new obstacle to macroeconomic stability and poses a complex scenario for investors, central banks and governments. Once again, uncertainty comes to the fore and will condition investors’ upcoming economic decisions.

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