IRGC Declares Strait of Hormuz Closed After Tanker Attacks

What happened

The Islamic Revolutionary Guard Corps (IRGC) Navy of Iran has once again declared the Strait of Hormuz closed, prohibiting the passage of ships of various nationalities. The declaration, reported by the state-run IRNA news agency, follows reports of attacks on oil tankers in the region. The IRGC warned that violating Iranian regulations in the Strait of Hormuz would result in severe consequences, referencing a supertanker that previously caught fire in the strait after hitting a naval mine. Furthermore, UK Maritime Trade Operations reported that at least two other tankers have been hit off Saudi Arabia’s coast since yesterday.

Why it matters

The Strait of Hormuz is one of the world's most critical maritime routes for oil transport, through which approximately one-fifth of the global daily oil consumption passes. The closure or threat of closure by Iran, especially in response to tanker attacks, represents a significant escalation of geopolitical tensions in the region. This situation raises the risk of oil supply disruptions, which could have a direct and substantial impact on global commodity prices and, consequently, on inflation and world economic growth. The aggressive rhetoric from the IRGC, mentioning the 'fire of trust of the American terrorist army,' suggests an increase in confrontation and unpredictability in the Middle East.

Market impact

• Interest Rates and Bonds: Geopolitical uncertainty and potential increases in oil prices tend to raise inflation expectations, which may lead central banks to maintain tighter monetary policies for longer. This tends to push the yields of Treasuries and other sovereign bonds upwards, reflecting a higher risk premium and the expectation of higher interest rates. In times of risk aversion, however, there may be a flight to safety into lower-risk bonds, such as US Treasuries, which could paradoxically limit the rise in short-term yields.
• Dollar and Exchange Rates: In scenarios of global uncertainty and increased geopolitical risk, the US dollar tends to strengthen, acting as a safe haven. Currencies of emerging market countries, including the Brazilian real, tend to depreciate against the dollar due to capital flight to perceived safer assets and the increased cost of oil, which impacts the trade balance of net importers.
• Equities: Global equity markets tend to react negatively to geopolitical escalations and increases in oil prices. Companies with high energy costs or those dependent on global supply chains may be particularly affected. Increased risk and potential global economic slowdown could lead to a correction in stock indices.
• Commodities: Oil is the most directly impacted commodity. The closure of the Strait of Hormuz or the perception of risk of supply disruption tends to cause a sharp rise in oil prices (Brent and WTI) due to the reduction of available supply in the global market. Other commodities, especially industrial ones, may have mixed reactions depending on the impact on global demand.
• Brazil: Brazil, as an oil producer, may see an initial benefit for Petrobras due to higher commodity prices. However, the global increase in oil prices tends to pressure domestic inflation and fuel costs, which may lead the Central Bank to be more cautious in easing the Selic rate. The depreciation of the real against the dollar, driven by global risk aversion, also contributes to inflationary pressure and may negatively impact purchasing power and economic growth.

What to watch

Next steps to monitor include confirmation of the extent of the tanker attacks, the response from Western powers and regional countries, and any further military movements in the Strait of Hormuz. Official statements from governments and international bodies regarding freedom of navigation in the region will be crucial. Additionally, the evolution of oil prices and the reaction of currency and interest rate markets will provide important indicators of risk perception.

Scenarios

Base Scenario: Elevated tensions persist, but a full and prolonged closure of the Strait is avoided due to international pressure and negotiations, keeping oil prices at high levels but without an extreme supply shock. Risk Scenario: The Strait's closure materializes or there are new significant attacks, leading to a substantial disruption of oil supply, with soaring prices, strong global risk aversion, and potential worldwide economic slowdown.

Original source: Middle East Eye. For information only, not investment advice.