Ceasefire hangs in balance after Iran shuts Hormuz
Hopes of an extended deescalation in the Middle East were hanging by a thread on Wednesday night, after Iran shut the vital Strait of Hormuz shipping lane in response to a round of Israeli strikes on Lebanon.
Oil tankers were stopped from passing through the shipping lane responsible for carrying over a fifth of seaborne oil and gas trade, with Tehran officials blaming Israel for carrying out its heaviest assault on Lebanon since the outbreak of the war.
Iran also launched an attack on Saudi Arabia’s all-important east-west pipeline, which carries oil away from the Gulf nation’s east coast to be shipped from the Red Sea, contravening the terms of a ceasefire it struck hour earlier with the White House. Other Gulf countries also reported being hit by drone attacks throughout Wednesday.
As part of the two-week truce agreed late on Tuesday night, Donald Trump promised to halt the barrage of air strikes on Iran, which had culminated in a promise to end “a whole civilisation”. In return, the Iranian regime agreed to re-open the Strait of Hormuz to shipping, sending stocks soaring and the spot price of oil tumbling.
Stocks soar on Iran ceasefire news
The FTSE 100, which closed before news of Tehran’s decision to re-block the shipping lane, ended the day 2.5 per cent higher in a stunning relief rally that carried the index to its highest level since the onset of the war.
Meanwhile the spot price of Brent crude – the international benchmark for oil – plunged more than 15 per cent on hopes the Strait’s reopening would release a glut of supply into international arena.
Despite the wave of relief coursing through markets, experts warned that the long-term effects of the war would still leave permanent scars on the UK economy even if the Strait is opened permanently.
David Mirzai, an energy analyst at SP Angel, branded Hormuz’s month-long closure as the “most severe supply shocks” in the history of global crude markets.
“I anticipate very real economic hardship this year because of the recent hostilities and disruption,” he told City AM.
UK households have been partially insulated from the conflict so far thanks to the government’s energy price cap, which sets the maximum unit price of energy three months in advance.
But refined petroleum products have risen sharply, leading to higher petrol prices at the pump and fears of acute supply shortages in fuel-reliant industries like farming and aviation.
“Energy prices will probably hold above their pre-war levels for many months, as damaged production capacity of the Gulf is repaired, trust-in-trade is rebuilt – and the existing war risk-premium across the region’s various trade prices eases,” said Tom Price, a commodity analyst at Panmure Liberum.
“Any post-war trade recovery story will probably take years to play out,” he added.