Oil falls as Trump announces plan to guide ships through Strait of Hormuz
Brent crude retreats from $126 four-year high after Trump says US will begin escorting commercial vessels through the strait.
Briefing
- Brent crude had surged above $126 per barrel, its highest level since 2022, after Donald Trump warned the US Navy blockade of Iranian ports could last months.
- Oil prices have since fallen after Trump announced a new plan to partially reopen the Strait of Hormuz by guiding ships through the corridor.
- Iran has kept the Strait of Hormuz largely shut, maintaining pressure on a route through which roughly 20% of global oil supply transits.
- Kalshi prediction market traders still expect US oil prices to exceed the Iran wartime high, rising above $125, as the conflict drags on.
- The US has dipped into its strategic oil reserves as the Iran war enters its third month, adding to pressure on domestic supply.
- Peace talks remain stalled, with traders pricing in continued standoff rather than a near-term diplomatic resolution.
Analysis
- Traders pricing a prolonged Hormuz closure rather than a near-term resolution means oil forward curves remain in steep backwardation, discouraging inventory builds and amplifying physical tightness. Budget airlines already lobbying for $2.5bn in relief face accelerating margin compression with no policy offset in sight, and European chemicals, aluminum smelting, and fertilizer producers face continued input cost pressure that extends earnings revision cycles into H2 2026.
- The UAE's departure from OPEC, now confirmed alongside a sustained Hormuz blockade, removes both the cartel's third-largest producer and its primary swing-capacity enforcer precisely when Saudi Arabia needs coalition discipline most. If Hormuz eventually reopens, OPEC lacks the coordination mechanism to manage the price unwind, creating asymmetric downside risk in crude once supply normalizes that is not yet priced into the forward curve.
- Consumer sentiment at a record low of 49.8 combined with Brent above $115 and one-year inflation expectations at 4.7% creates conditions where demand destruction in discretionary consumer spending materializes before equity multiples reprice. Retail, restaurants, and domestic travel equities remain particularly exposed, as gasoline above $4 directly reduces disposable income for the lower-income cohort most sensitive to fuel costs.
Historical Context
- 2011-2012
Iran threatened to close the Strait of Hormuz in response to Western sanctions, driving Brent above $125. The threat alone without physical closure caused sustained price elevation. The current briefing describes an actual extended blockade rather than a threat, making the prior episode a floor rather than a ceiling for price impact.
- 1990
Iraq's invasion of Kuwait removed roughly 9% of global oil supply and briefly closed key Gulf shipping lanes. Crude doubled within weeks. The episode established that Gulf supply disruptions transmit directly into global recession risk via consumer purchasing power erosion, the same transmission channel active today with a larger volume at stake.
- 1979-1980
The Iranian Revolution and subsequent Iran-Iraq War disrupted Hormuz transit and contributed to a sustained oil price shock. The Federal Reserve's response to entrenched inflation expectations in that episode is the precedent most relevant to current 4.7% one-year inflation expectations alongside record-low consumer sentiment.
Connected Events
UAE quits OPEC, OPEC+, and OAPEC, ending nearly 60 years of membership
The UAE's exit from OPEC effective May 1 removes the cartel's most credible swing producer at the precise moment Saudi Arabia needs coalition discipline to manage post-Hormuz price dynamics, compounding the supply coordination failure described in this briefing.
IEA: Hormuz closure creates largest energy security threat in history
The IEA characterized the Hormuz closure as the largest energy security threat in history, estimating 13 million bpd removed from global supply. The current briefing's description of traders pricing a prolonged closure rather than a near-term resolution is consistent with that open-ended supply gap remaining unresolved.
US budget airlines lobby Trump for $2.5bn relief amid rising fuel costs
US budget airlines already lobbying for $2.5bn in federal fuel relief face a deteriorating negotiating position as Brent moves above $115, with the DOT requiring Congressional involvement and no resolution in sight.
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