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Expect much higher prices for oil when the market opens. Here are the events in play.

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Iran Orders Closure of Strait of Hormuz

Color me skeptical that Iran can pull this off for any length of time, but the New York Post reports Iran Orders Closure of Strait of Hormuz putting one-fifth of world’s oil supply at risk.

Iran’s parliament has voted to close the Strait of Hormuz, the vital shipping channel through which around 20% of the world’s daily oil flows.

The move, which could block $1 billion in oil shipments per day, is likely to send oil prices soaring.

It will come into effect pending a final decision by Iran’s Supreme Council.

The Supreme Council’s decision must be made by tonight, according to Iran’s state-run Press TV.

Iran’s major escalation in response to US strikes on its nuclear facilities “will be done whenever necessary,” Email Kosari, Commander in the Revolutionary Guards, said on Sunday.

The strait connecting the Gulf of Oman with the Persian Gulf is one of the world’s most critical chokepoints — just 20 miles wide at its narrowest point.

Shipping lanes in the strait — the area that is deep enough for ships to pass — are even narrower at less than two miles wide in each direction, making them much more vulnerable to attacks and threats of closure.

Strait Closure More Fear than Reality?

I side with the Reuters article Iran Oil Doomsday in Hormuz May Be More Fear than Reality.

While Israel and Iran have targeted elements of each other’s energy infrastructure, there has been no significant disruption to maritime activity in the region so far.

But President Donald Trump’s decision to join Israel by bombing three of Iran’s main nuclear sites in the early hours of Sunday could alter Tehran’s calculus. Iran, left with few cards to play, could retaliate by hitting U.S. targets across the region and disrupting oil flows.

Can They Do It?

The first question to ask is whether Iran is actually capable of seriously disrupting or blocking the Strait of Hormuz.

The answer is probably yes. Iran could attempt to lay mines across the Strait, which is 55 km (34 miles) wide at its narrowest point. The country’s army or the paramilitary Islamic Revolutionary Guard Corps (IRGC) could also try to strike or seize vessels in the Gulf, a method they have used on several occasions in recent years.

Moreover, while Hormuz has never been fully blocked, it has been disrupted several times.

During the 1980s Iran-Iraq war, the two sides engaged in the so-called “Tanker Wars” in the Gulf. Iraq targeted Iranian ships, and Iran attacked commercial ships, including Saudi and Kuwaiti oil tankers and even U.S. navy ships.
Following appeals from Kuwait, then-U.S. President Ronald Reagan deployed the navy between 1987 and 1988 to protect convoys of oil tankers in what was known as Operation Earnest Will. It concluded shortly after a U.S. navy ship shot down Air Iran flight 655, killing all of its 290 passengers on board.

History Lesson

history has shown that severe disruptions to global oil supplies have tended to be short-lived.

Iraq’s invasion of neighboring Kuwait in August 1991 caused the price of Brent crude to double to $40 a barrel by mid-October. Prices returned to the pre-invasion level by January 1992 when a U.S.-led coalition started Operation Desert Storm, which led to the liberation of Kuwait the following month.

What If Iran Tries to Close the Strait of Hormuz?

Bloomberg asks What If Iran Tries to Close the Strait of Hormuz?

Could Iran really block the Strait of Hormuz?
Iran would have no legal authority to order a halt to traffic through Hormuz, so would need to achieve this by force or the threat of force.

If its navy tried to bar entry to the strait, it would likely be met with a strong response from the US Fifth Fleet and other Western navies patrolling the area.

But it could cause severe disruption without a single Iranian warship leaving port. One option would be to harry shipping with small, fast patrol boats. Or it could launch drones and fire missiles toward ships from coastal or inland sites. That could make it too risky for commercial ships to venture through.

Similar tactics have been employed successfully by the Houthi militia in Yemen to disrupt traffic through the Bab el-Mandeb strait leading into the Red Sea on the other side of the Arabian peninsula. The Houthis have mostly fired missiles and drones at ships after warning owners of vessels linked to the US, the UK and Israel that they will be attacked if they approach the area.

Closing the Strait of Hormuz would quickly hit Iran’s own economy as it would prevent it from exporting its petroleum. And it would antagonize China, the biggest buyer of Iranian oil and a critical partner that’s used its veto power at the UN Security Council to shield Iran from Western-led sanctions or resolutions.

Who relies most on the Strait of Hormuz?

Saudi Arabia exports the most oil through the Strait of Hormuz, though it can divert shipments to Europe by using a 746-mile pipeline across the kingdom to a terminal on the Red Sea, allowing it to avoid both the Strait of Hormuz and the southern Red Sea. The UAE can export some of its crude without relying on the strait, by sending 1.5 million barrels a day via a pipeline from its oil fields to the port of Fujairah on the Gulf of Oman to the south of Hormuz.

With its oil pipeline to the Mediterranean closed, all of Iraq’s oil exports are currently shipped by sea from the port of Basra, passing through the strait, making it highly reliant on free passage. Kuwait, Qatar and Bahrain have no option but to ship their oil through the waterway. Most of the oil passing through the Strait of Hormuz heads to Asia.

WTI Oil Poised to Open at $80

Bloomberg discusses a Fragile Moment for the Global Economy:

The rising geopolitical risks intersect with a potential escalation in tariffs in the coming weeks as President Donald Trump’s pauses of his hefty so-called “reciprocal” levies are due to expire. The biggest economic impact from a prolonged conflict in the Middle East would likely be felt via surging oil prices.

Post the US strike, a derivative product that allows investors to speculate on price swings in crude oil surged 8.8% on IG Weekend Markets. If that move were to hold when trading resumes, IG strategist Tony Sycamore said he projects WTI crude oil futures will open at around $80 per barrel.

How High at the Open?

WTI is West Texas Intermediate. US oil prices should be the least impacted. The Friday close was $74.93.

If the $80 target is correct, WTI would open about $5 higher, which is a 6.7 percent jump.

If the 8.8 percent derivatives number is accurate, we are looking at an open of $81.52. Brent crude is currently at $75.48 and is poised to be more impacted.

Does this Make Any Sense?

Not to me. Iran has zero cards. Whether you agree with the US attack or not, Iran has no cards and no lasting threats.

All Iran can do is economically harm itself. This assessment holds true up and until the moment it actually has a nuclear weapon. And that’s why it wants one.

If Iran had a bomb, the US and Israel would not have been able to do what it did.

What Will This Do to Fed Rate Cut Odds?

Nothing lasting, if anything at all. As reported this morning, Fed Rate Cuts Odds for July Only 10.3 Percent.

There is no Fed meeting in August. This incident will have cleared up by September.

Spotlight Reciprocal Tariffs

Even though there will not be a long-term impact from these events, the short-term impact is higher oil and higher reported inflation.

This is happening just as Trump is scheduled to reinstate reciprocal tariffs.

There are conflicting stories of a July 9 reinstatement by Trump, and a further delay by Secretary of Treasury Scott Bessent.

TACO Trump Delays Again as Bessent Pushes Back a July 9 Announcement

On June 16, I commented TACO Trump Delays Again as Bessent Pushes Back a July 9 Announcement.

Oil will give the administration another excuse to delay.

April 17, 2025: Trump Wants 90 Trade Deals in 90 Days. How Realistic Is That?

The administration says we are on “Trump time”. Any bets?

April 25, 2025: Trump Tells Time Magazine He Has Made 200 Deals Already, Refused to Name Any

Check out this incredible interview with Time.

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June 6, 2025: Reciprocal Tariffs Are Dead, but Trump Has 7 Other Options to Discuss

Enjoy the Stay

If the appeals court ruling is wide enough the Supreme Court may not even hear a further appeal.

The uncertainty of on-off tariff threats is itself economically damaging. Businesses have no way of reacting to Trump’s ever-changing mood.

Trump has made no deals other than the UK, except in his head.

For now, the Appeals Court granted a stay. The full appeals court hears final arguments on July 31. In August, we will have a ruling from the Appeals Court.

I remain very confident Trump will lose. However, Trump can and will do a lot of economic damage to the country between now and then.

Recession is baked in the cake.

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