Hormuz Strait Disruption: Market Expectations, Geopolitical Triggers, and the Oil Price Paradox

Bleak Outlook for Hormuz Strait Shipping Normalization

Market traders widely anticipate that the Strait of Hormuz will struggle to return to normal shipping operations before 2026. The latest data from Kalshi reveals a mere 34% probability of the strait resuming normal passage by next January, implying a 66% chance of continued obstruction. The market's definition of 'normal shipping' is based on the seven-day moving average of vessels transiting the strait exceeding 60 ships. Notably, just two weeks prior, the market assessed the probability of normalization by August at 66%, a stark decline to the current 21%.

Geopolitical Escalation as a Primary Catalyst

The direct trigger for the precipitous drop in the likelihood of normal shipping in the Strait of Hormuz is the renewed conflict between Iran and Israel. Last Sunday, Iran accused Israel of violating a ceasefire agreement and continuing attacks on Lebanon, prompting Iran to launch missile strikes on northern Israel. Israel, in response, stated it carried out extensive strikes on Iran's strategic defense systems.

U.S. President Donald Trump hinted last week that a blockade of the strait could persist until early September, coinciding with Labor Day. Speaking from the White House, he commented, "I think it might, but not likely, and it will be resolved very quickly." Despite Iran's Foreign Ministry announcing on Monday a halt to strikes against Israel, market bets did not significantly fluctuate. President Trump later posted on social media that the Strait of Hormuz would remain fully blockaded until a final agreement is reached.

The Oil Paradox: Major Disruption, Calm Prices

The Strait of Hormuz is currently experiencing one of the most severe supply shocks in its history, yet oil prices have remained unusually calm, a significant enigma for the global economy. This conflict with Iran has effectively paralyzed transit through the strait for over three months. JPMorgan data indicates that current transit volumes are only 15% of pre-war levels. Prior to the conflict, approximately 15.6 million barrels of crude oil were shipped daily through the strait, representing over a quarter of global seaborne crude oil trade.

However, crude oil prices have not surged to the dangerous highs that markets feared. Brent crude and WTI crude prices dipped to around $91 and $90 per barrel, respectively, on Tuesday.

Core Reasons for Oil Price Stability

Experts point to a significant volume of crude oil bypassing the strait blockade through clandestine channels, effectively mitigating the supply shock. Tankers are turning off their transponders to evade tracking, creating 'ghost voyages.' JPMorgan estimates that in the last two weeks of May, secret shipments amounted to approximately 2.1 million barrels per day.

Jan Stuart, Global Energy Economist at Piper Sandler, calculated that in May, about 2.9 million barrels per day of crude oil were shipped out of the strait, with 2.1 million barrels per day being paid transit and 0.8 million barrels per day through 'ghost shipping.'

Piper Sandler's data also shows that approximately 4.5 million barrels per day of crude oil are flowing out of the Persian Gulf via alternative routes, primarily the Saudi East-West pipeline, which transports crude from fields to the Red Sea port of Yanbu for export.

Bob McNally, founder of Rapidan Energy Group, stated, "Strait traffic might be 0%-10% of pre-war levels, with clandestine shipping making it slightly higher. While not enough to prevent significant inventory draws, it has significantly eased the crisis."

Furthermore, a substantial reduction in crude oil imports by key global energy consumers, coupled with a pivot towards large-scale inventory utilization, has been a critical factor in maintaining oil price stability.

Natasha Kaneva, Head of Global Commodity Strategy at JPMorgan, added, "The extent of the demand drop was greater than anticipated, and inventories were larger than reported, both contributing to oil price stability." She noted:

"Oil prices approaching $100 per barrel do not signify a limited impact, but rather that the market has found a costly yet effective way to cope."

Warnings Against Complacency

However, veteran oil industry insiders warn that the market is being lulled into complacency by short-term hedging measures, severely underestimating the actual impact of the disruption. Since the onset of the conflict, commercial crude oil inventories have declined substantially. The U.S. Strategic Petroleum Reserve (SPR) has also depleted rapidly, nearing its lowest levels since the early 1980s.

Stuart of Piper Sandler forecasts that Brent crude will average $130 per barrel in July-August. If this projection holds true, U.S. gasoline prices could surge above $5 per gallon this summer, from the current approximately $4.20 per gallon.

Stuart believes that oil prices need to rise quickly to incentivize emergency reserve releases and curb global consumption, stating, "Higher prices make it easier to convince people to conserve energy."