MUFG’s Senior Currency Analyst Michael Wan notes that Trump’s announcement of a blockade of the Strait of Hormuz, following failed US–Iran talks, pushed Brent Oil up 9% to US$103 per barrel. Although US Central Command clarified a narrower enforcement scope, uncertainty over tanker flows and limited prospects for a durable reopening of the Strait keep upside risks for Brent elevated.

Blockade fears keep Brent supported

"Trump announced a blockade of the Strait of Hormuz over the weekend, after US and Iran negotiators left Pakistan without an agreement following a marathon 21-hour session. Brent oil prices surged 9% to US$103/bbl, risk assets fell, the Dollar strengthened, and Asian currencies weakened."

"While this is not exactly a blockade of the Strait of Hormuz, how this will work in practice including the act of differentiating the origin of vessels is still unclear."

"It is however important to highlight the important positives that have developed over the weekend despite Trump’s announcement."

"First, this was the highest level of diplomatic contact between the US and Iran over the past four decades, and with the Iran side in particular sending in a meaningfully large delegation including economic officials such as the central bank governor, and as such highlighting the seriousness the Iranians in particular brought to these negotiations."

"Second, reports suggest the negotiations stretched into technical and expert level meetings on the second day, and as such indicating that there were substantive discussions and progress being held."

"Third, there were three oil supertankers which crossed the Strait of Hormuz over the weekend, and totalling around 6 million barrels. This would likely represent the largest non-Iranian tanker flow since the Iran/Middle East conflict started."

"Of course, all these points are moot if hostilities resume, which ultimately also depends on how this blockade is enforced. Will Chinese tankers taking Iranian oil from Iranian ports be blocked for instance? We have our doubts about that and how that will work in practice."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)