"If the Strait of Hormuz Cannot Be Reopened, an Oil Price Surge Is Inevitable...We Must Brace for $150 a Barrel"

[The Financial News]


Skepticism is mounting that the various measures rolled out by the Donald Trump administration to cool the surge in international oil prices will do little to help.
Experts warn that unless the Strait of Hormuz—through which 20% of the world’s oil and natural gas flows—is reopened, any policy response will be nothing more than a temporary stopgap.

On the 6th (local time), President Trump announced a range of measures, yet international oil prices still skyrocketed.
Major insurers, alarmed by the rapidly escalating risks, are canceling coverage for ships currently transiting the Strait of Hormuz.
Trump tried to reassure markets by saying the U.S. government would create a 20 billion dollar reinsurance facility to backstop ship insurance and deploy the Navy to escort vessels. However, the market reaction he had hoped for failed to materialize.
He also eased sanctions on Russia in an attempt to partially offset the shortfall in oil and natural gas supplies, but this too has provided little relief.
The United States of America (U.S.) was also reported to have considered increasing domestic oil production as well as output in the Bolivarian Republic of Venezuela, but those plans were later shelved.

According to the Financial Times (FT), most experts agree that there is no real solution to the recent oil price spike other than the U.S. and its allies swiftly neutralizing the Islamic Republic of Iran’s ability to threaten and blockade the Strait of Hormuz.
Mike Sommers, chief executive officer (CEO) of the American Petroleum Institute (API), said, "The real focus has to be on clearing the obstacles in the Strait of Hormuz," adding, "None of the other alternatives from the Trump administration can provide the stability the global economy needs." Sommers stressed that any option that does not remove the threats surrounding the Strait of Hormuz will at best have only limited impact.
The blockade of the Strait of Hormuz is also forcing Gulf oil producers to halt production. Although the Islamic Republic of Iran has not directly attacked their oil facilities, the closure of the strait has prevented tankers from entering and leaving, leaving them with nowhere to store the crude they pump.

In an interview with the FT on the 6th, Qatar's Minister of Energy warned that they may soon have to suspend production because storage capacity is running out, and cautioned that international oil prices could break through 150 dollars a barrel within weeks.
Amid supply disruptions, Brent Crude Oil, the global benchmark, jumped to 92.69 dollars per barrel for May delivery on the 6th, while West Texas Intermediate crude oil (WTI), the U.S. benchmark, surged to 90.90 dollars per barrel for April delivery. Based on closing prices, Brent climbed 28% over the past week, marking its biggest weekly gain since April 2020, while WTI soared 36%, the largest weekly increase in 43 years since 1983.
The Goldman Sachs Group, Inc. (Goldman Sachs) warned that if no solution emerges, oil prices could break above 100 dollars a barrel as early as this week.
Goldman Sachs said the decisive factor is whether the Strait of Hormuz can be reopened. It warned that if the blockade continues, Brent could easily surpass 147 dollars a barrel, as it did in 2008 and 2022.

Even the United States, one of the world’s leading oil producers, is in a difficult position. After the price surge that followed Russia’s invasion of Ukraine in 2022, the previous administration of Joseph Robinette Biden Jr. released large volumes from the strategic petroleum reserve (SPR). The stockpile has yet to be replenished, leaving Washington with little room to respond to sharp price swings. Trump vowed after taking office in January last year to refill the SPR, but he failed to keep that promise even when prices were low, effectively shooting himself in the foot.
Republican Party (GOP) Representative August Pfluger criticized that the SPR shortfall has left the U.S. "extremely vulnerable."
The Islamic Republic of Iran’s threat to blockade the Strait of Hormuz is dealing a severe blow to the global energy supply chain.
Fewer than 50 ships have passed through the strait over the past week. Around 500 oil tankers and Liquefied Natural Gas (LNG) carriers are circling in nearby waters, unable to risk crossing. Shipowners say they will only attempt the passage once their safety is guaranteed.

Some experts are lashing out at the Trump administration’s clumsy handling of both its military operations against the Islamic Republic of Iran and the resulting oil price surge. They warn that without decisive action, the oil market could enter a phase of collapse this week.
Michael Alfaro, chief investment officer (CIO) at Gallo Partners, a hedge fund specializing in energy and industrials, argued, "Many of the policies the U.S. administration has decided on or floated over the past 48 hours only show how desperately it wants stability in the oil market." In other words, the government’s panicked response to soaring prices has merely heightened market anxiety.
Alfaro warned, "If the situation continues to deteriorate and there is no sign that the Strait of Hormuz will reopen by the 9th, energy prices will spike again."
This could prove devastating for Trump ahead of the midterm elections.
Mark Zandi, chief economist at Moody's Analytics, warned that every 10 dollar increase in oil prices per barrel shaves 0.1 percentage point off the U.S. real gross domestic product (GDP) growth rate.
The Federal Reserve System (Fed) likewise fears that a sharp rise of around 20 dollars per barrel will dampen consumption and cut growth by 0.1 to 0.2 percentage points.

dympna@fnnews.com Song Kyung-jae Reporter