A major source of uncertainty stems from the Iranian blockade of the Strait of Hormuz. Roughly 20% of the world’s oil and gas supply passes through the strait. As such, a prolonged closure of the Strait of Hormuz could lead to a huge shortage of energy supplies. While some investors see parallels between today’s crisis and the Middle East oil shock in the 1970s, Hakan Kaya, a managing director and senior portfolio manager at the asset management firm Neuberger Berman, says today’s market turmoil is unprecedented.
Kaya is a part of Neuberger Berman’s quantitative and multi-asset strategies team, where he contributes to the firm’s asset allocation research and risk management. Before joining the firm in 2008, the Princeton PhD graduate was a consultant at Mount Lucas Management Corporation, where he developed weather risk and statistical models for commodity investing.
No real historical precedent
“In terms of scale, this is something we simply have not dealt with before,” Kaya told The Edge Singapore. “The Strait of Hormuz normally carries about 20 million barrels a day of crude and products, roughly a fifth of global seaborne oil trade. Right now, flows are down by more than 90%. There is no real historical precedent for a chokepoint of this importance being effectively shut.”
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That said, history does provide one crucial lesson for investors.
Even though the blockade has pushed Brent crude to over US$115 a barrel, any recovery will be slow. For instance, Iraq’s oil production collapsed during the 2003 war. Kaya says it took about a decade for oil output to return to prior levels. The same thing has happened to Libya and Syria, whose oil levels have never returned to their original levels following the collapse of their governments.
“More recently, the Houthis’ attacks in the Red Sea are a useful reminder. Container traffic through Suez is still down sharply more than two years on,” Kaya says. “Once shipping patterns break, they often stay broken longer than anyone expects.”
This is despite attempts by countries to ameliorate the impact of the oil shock by tapping into their petroleum reserves. The International Energy Agency released 400 million barrels of oil from its reserves on March 11, though that has done little to calm markets. Using the reserves only provides a buffer but is not a fix, Kaya says.
“The constraint is not the size of the stockpile, it is the speed at which oil can actually be delivered into the market,” he adds. “When you are potentially losing double-digit millions of barrels a day through Hormuz, those releases buy time; they do not close the gap.”
The shortage has spurred the US to lift oil sanctions on Russia and even Iran to help shore up the global oil supply. That, however, will only provide help at the margin, Kaya says. “Those flows matter, and they likely prevent a complete price blowout. But again, they do not replace the volume lost if Gulf exports remain constrained.”
Kaya says he would not put much hope in Iran’s offer to allow tankers from friendly countries to pass through the Strait of Hormuz. This is because the operational reality remains “extremely challenging” for vessels sailing in the area.
“Insurance coverage is limited, naval escorts only cover parts of the transit, and crews and shipowners ultimately have to decide whether the risk is acceptable,” Kaya says, noting that most ships are actually switching off their transponders to avoid detection.
“Even in the best-case scenario where some Chinese or Indian tankers move through, volumes would be a fraction of normal flows.”
In fact, reopening the Strait of Hormuz will not lead to an instantaneous resumption of oil production. According to Kaya, major Gulf producers have already shut in millions of barrels a day because they simply have nowhere to send the oil. This could have serious implications for oil prices in the mid to long term.
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If the closure of the strait does not resolve in the next few weeks, then the world could see a reprise of what happened in 2022 when Russia started its invasion of Ukraine. That period saw Brent crude trading well above recent cycle highs as the market tried to price in a sudden loss of supply.
However, if the blockade were to persist for several months, the market could be in for a shock more reminiscent of 2008, when oil hit nearly US$150 a barrel. “A prolonged disruption of this scale would force sustained inventory drawdowns and could push prices toward levels we have not seen in more than a decade,” Kaya says.
That said, one should not assume that oil prices will go up forever, he adds. Businesses will eventually cut down and moderate their oil consumption. “At some point, oil prices start to act like a consumption tax. Demand begins to erode, economic activity slows, and the price itself becomes the mechanism that restores balance.”
Gold is falling, but for good reason
Gold investors hoping for price appreciation have been left disappointed by the yellow metal’s tepid reaction. This should not come as a surprise, Kaya says, adding that the decline in gold prices has nothing to do with it being too expensive. For him, it is not war, but interest rates that drive gold prices.
“Wars are not automatically bullish for gold,” Kaya says. “What matters is how the conflict feeds into growth, inflation, and monetary policy. Right now, energy prices are pushing inflation expectations higher, but the growth outlook has not deteriorated enough to force the Federal Reserve into aggressive easing.”
“That combination is not ideal for gold. Higher inflation without rate cuts means higher yields, and that tends to cap gold in the short term.”
Instead, what investors should be looking out for is stagflation. If the war in Iran were to drag on, then central banks may be forced to cut rates despite inflation. That could help to drive gold prices higher. “Gold is not failing. It is waiting for policy to shift,” Kaya says.
Don’t ignore second-order effects
Besides gold, the war is also disrupting other commodities and asset classes. One notable beneficiary of the uncertainty is the US dollar, which Kaya says tends to strengthen during energy shocks. This is because oil is priced in dollars and the global demand for liquidity tends to rise during turbulent markets.
Additionally, the closure of the Strait of Hormuz will have knock-on effects on other commodities, such as liquefied natural gas, petrochemicals, fertilisers and sulfur. In particular, a shortage of the latter could drive up copper prices, an industrial metal critical to the construction of AI data centres.
“A significant share of global seaborne sulfur comes out of the Middle East, and much of it transits through Hormuz,” Kaya says. “The African Copperbelt relies heavily on imported sulfur for acid leaching. If those supplies are interrupted for an extended period, meaningful copper production is at risk.”
As such, copper prices might find themselves in a perfect storm of strong, structural demand from the AI boom and supply constraints due to Iran.
“On its own, a few percentage points of global supply might not sound dramatic. But copper was already tight before this crisis. Layering an additional supply constraint onto an already fragile balance can have outsized price effects,” Kaya adds.
Rough road ahead
Looking ahead, Kaya is watching a few indicators closely to assess whether the market is truly pricing in the reopening of the Strait of Hormuz.
First, the prediction markets, which give a good gauge of market expectations; second, the steepness of the oil curve. A flattening curve means the market is gaining confidence. Third, the spreads for diesel and jet fuel, and whether they normalise from their present elevated levels. Finally, the behaviour of shipowners and insurers.
“Political statements are noise,” Kaya says. “When insurance costs fall, transponders come back on, and traffic resumes, that is when the market truly believes the Strait is reopening.”
Doom and gloom aside, Kaya says the current market environment presents an opportunity for commodity investors. When energy and food prices rise, commodities become a portfolio hedge rather than a speculative trade. That will help to offset the pressure in the growth and equity markets.
Instead of picking a single winner, Kaya favours a broad approach that considers energy, agriculture, as well as industrial metals. All three share linkages that are tighter than they seem, he says. This will be the case even if the war were to end.
“Oil prices may come down relatively quickly because the market is liquid and responsive. But shipping behaviour, insurance, and production restarts take time,” Kaya says. “Agriculture is even stickier. Missed planting windows and delayed fertiliser deliveries have lasting effects that do not disappear with a ceasefire.”
“While headline prices may ease, second-order effects can persist for quarters,” he adds. “That is why maintaining some commodity exposure even after tensions fade often makes sense.”
