Dire Straits in the Gulf: US–Israel Strikes Iran, Oil Surges as Eyes Fix on Hormuz

💡Following the Middle East conflict, Brent crude futures surged 13% to over $82, reaching the highest price since early 2025. European TTF natural gas futures increased by over 70% in two trading days due to LNG supply disruptions. Gold spot prices rebounded to $5,400 per ounce, nearing the historical high from late January, as safe-haven sentiment renewed, while global equities generally faced pressure except for the energy sector.

💡Trump's 'Peace Through Strength' strategy, outlined in the 'US 2025 National Security Strategy,' redefined US core interests in the Persian Gulf by emphasizing that Persian Gulf energy supplies must not fall into enemy hands, the Strait of Hormuz must remain open, and the Red Sea must allow free passage, preventing it from becoming a base for terrorism. This framework prioritizes physically removing Iran's ability to threaten waterways by destroying its missile industry and naval facilities, aiming to replace a long-term 'military standoff' with 'regime collapse' by publicly calling on the Iranian people to overthrow the government.

💡Following Supreme Leader Khamenei's death, Iran's regime transition has four potential scenarios: 'Regime unchanged' (high probability), maintaining the existing theocratic system with an 88-member Assembly of Experts electing a new Supreme Leader, but failing to resolve domestic and Western conflicts. 'Long-term transition' (medium-high probability) involves 'collective rule' by a provisional guidance committee or a figurehead Supreme Leader, with real power held by Ali Larijani and IRGC generals, maintaining regime legitimacy. A 'Military coup' (low probability) by the IRGC, which controls 30-50% of Iran's national economic output, is less likely as elite leaders would protect vested interests. 'Regime collapse' (medium-low probability) entails the theocratic regime collapsing under Trump's encouragement, leading to internal revolution and the potential return of secular opposition or the exiled royal family, supported by the US to establish a pro-Western democratic regime.

💡The Strait of Hormuz is a critical chokepoint for global energy trade, situated between Oman and Iran, connecting the Persian Gulf, Gulf of Oman, and Arabian Sea. The International Energy Agency (IEA) estimates that one-quarter of global seaborne oil trade and one-fifth of LNG trade passes through this strait. Additionally, Kpler data indicates that Europe relies on the strait for 25-30% of its aviation fuel, and India for up to 85% of its liquefied petroleum gas (LPG) imports and exports, underscoring its indispensable role in international energy flows.

💡Since February 28, the conflict has significantly impacted shipping traffic and insurance rates in the Strait of Hormuz, with Bloomberg and Marine Traffic data showing a sharp decline in transiting vessels and hundreds waiting near Fujairah and offshore Dubai. Marine insurance and tanker rates have reached recent highs. Major shipping companies like Maersk, MSC, and Hapag-Lloyd have rerouted vessels via the Cape of Good Hope, while Japanese and Taiwanese carriers suspended Persian Gulf operations due to Iranian retaliatory attacks on commercial vessels and IRGC interference with satellite navigation systems, leading to increased caution among operators.

💡OPEC+ responded to the escalating conflict by holding a ministerial meeting on March 1, deciding to gradually phase out the 1.65 million barrels per day voluntary production cut announced in April 2023, agreeing to raise production targets by 206,000 barrels starting in April. However, this decision faced limitations: the timing constraint meant the additional supply would not be released until April, too late for the immediate market squeeze; logistical constraints affected countries like Iraq and Kuwait that lack alternative pipeline infrastructure; and the scale constraint rendered the 206,000 barrels per day increase negligible compared to the roughly 16 million barrels per day transiting the Strait of Hormuz.

💡The three market scenarios for oil prices amid the Middle East realignment are: 'Optimistic (Peace Mode),' where Iran and the West reach a ceasefire, the Strait of Hormuz normalizes, geopolitical premiums dissipate, and oil prices ease to the $60s. 'Neutral (Delay Mode),' where Iranian forces counterattack, warfare drags on, the Strait is obstructed but not fully blockaded, and oil prices oscillate at high $70s levels with high volatility until negotiations clarify. 'Pessimistic (Survival Mode),' an extreme tail risk, involves strikes on Iran's core energy facilities, Iran adopting a 'mutual destruction' strategy, fully cutting off the strait, and oil prices facing uncontrolled upside pressure, while OPEC+ production losses could equate to 10% of global output.

💡The 'Long-term' strategic logic behind the US military stance concerning US-China rivalry is to disrupt China's Middle East strategy by dismantling non-Western strategic alliances and hostile proxies. Beijing's 'China-Iran Comprehensive Cooperation Plan' in 2021 involved $400 billion in investments for discounted oil, aiming to establish an energy backup against the 'Malacca Dilemma' and promote a 'petro-yuan' system to challenge US dollar hegemony. The US seeks to sever China's energy and geopolitical influence, redirecting strategic resources to the Indo-Pacific region, thus underscoring the broader US-China hegemony competition.

💡Rising oil prices, specifically above $70, affect the Federal Reserve's monetary policy and rate cut expectations by compressing the Fed's easing space in the first half of the year, due to the WTI oil price base in the first half of 2025 averaging $68. This increase contributes to inflation expectations, potentially delaying expected rate cut timing to September. If the situation shifts to an optimistic negotiation scenario, a mid-year (June) rate cut probability rises, allowing for stock additions; conversely, a strait blockade or significant production damage leading to decoupled inflation expectations would necessitate vigilance for a reversal of the easing cycle and repricing of market risks.

💡Asian buyers like China and India will be forced to premium-bid in the spot market or purchase Brent futures on ICE to lock in costs due to Middle East maritime disruptions. Short-term maritime route disruptions and export blockages may lead to storage capacity limits for producers, potentially forcing countries like Iraq and Kuwait to cut production. This exacerbates oil market supply pressures, especially as Iran's daily crude production of 3.3 million barrels and exports of 1.6 million barrels, mainly from Kharg Island, are suppressed by the conflict, contributing to a rise in 'unplanned outages.'