Key Takeaways:
An RBC strategist warns that market optimism for a swift reopening of the Strait of Hormuz is dangerously misplaced, setting the stage for a potential oil price shock.
Royal Bank of Canada’s top commodity strategist is dismissing consensus hopes for a June reopening of the Strait of Hormuz, warning a prolonged closure will send oil prices toward record highs and trigger a sharp stock market downturn.
"The market’s optimism is based on magical thinking, a fragile assumption that economic pain automatically triggers a policy lever to let tankers through," Helima Croft, Global Head of Commodity Strategy at RBC, said in a recent note.
The warning comes as the vital shipping lane remains shut for over 70 days, choking off an estimated 12.5 million barrels of daily oil flow and pushing July Brent crude futures above $105 per barrel. Global inventories are falling at a record pace to compensate, with the International Energy Agency warning that rapidly shrinking buffers may herald future price spikes.
Should the blockade extend into the summer demand peak, RBC forecasts oil prices will surpass the highs seen after Russia’s invasion of Ukraine and challenge the 2008 peak near $147. This would force a rebalancing through demand destruction, leading to higher bond yields and what Croft describes as a "significant equity market correction."
Croft is deeply skeptical of popular scenarios for a quick resolution, arguing that both diplomatic and military options face severe constraints. She believes a comprehensive diplomatic deal is unlikely as Iran will not easily relinquish control over a strategic chokepoint that has become a key point of leverage. At the same time, a large-scale US military intervention to force the strait open is not being seriously considered by the White House.
The full impact of the supply loss has been temporarily masked by drawing down commercial and strategic stockpiles. According to Swiss bank UBS, global inventories fell from a decade high of just over 8 billion barrels at the end of February to 7.8 billion by the end of April.
If the current situation persists, those buffers will prove insufficient. JPMorgan analysts noted that of the total inventory, only about 800 million barrels are truly available without straining the global supply chain. The bank forecasts that stockpiles could fall to a critically low level of 6.8 billion barrels by September if the strait remains closed, a point at which analysts from Rapidan Energy warn the global economy would "seize up."
The view of a protracted crisis is echoed by producers. Saudi Aramco CEO Amin Nasser warned that if the blockade continues into June, the global energy crisis could last until 2027. He stated the market is losing 100 million barrels of supply every week.
"The longer the supply disruptions continue, even for another few more weeks, it is going to take a much longer time for the oil market to rebalance and stabilize," Nasser said on the company's recent earnings call. Even if the strait were to reopen today, he added, it would take months for the market to normalize.
For now, the market is in a state of what Nasser calls "demand rationing." But Croft warns that before true demand destruction brings the market back into balance, a spike in oil prices and interest rates could deliver a painful blow to equity markets that have become newly sensitive to bond yields.
This article is for informational purposes only and does not constitute investment advice.
