Strait of Hormuz closed: Oil hits $81 as Iran crisis deepens

Oil tankers are stuck. Gas prices are jumping. And Canadian drivers are about to feel it at the pump.

The Strait of Hormuz – that narrow waterway handling about 20% of global oil shipments – has been effectively shut down for five straight days now. U.S. Crude is trading around $74 a barrel, up from $68 just a week ago. Brent crude hit $81.

That’s a 15% increase since this whole mess started.

All this after a U.S (no, seriously). Submarine sank an Iranian warship off Sri Lanka’s coast Tuesday. Turkey says NATO air defenses took out an Iranian ballistic missile. Round-the-clock U.S. And Israeli strikes on Iran continue into their sixth day.

The Numbers Don’t Lie

Look, Denver gas prices have jumped 50 cents since December. That’s just the beginning.

Analysts predict Canadian gas prices could rise 25 to 35 cents per litre within two weeks if the Strait of Hormuz stays blocked. We’re talking real money here. The kind that hits your wallet every time you fill up.

Asian markets got absolutely hammered. South Korea’s KOSPI index dropped 12% today – its biggest single-day loss on record. That wiped out $180 billion in market value in a single trading session.

Over two days, the tech-heavy index has lost more than 18% of its value. Japan’s Nikkei fell 3.6%, erasing $240 billion. Taiwan stocks down 4.3%, with semiconductor giant TSMC falling 6.8%.

But here’s where it gets weird.

Wall Street actually rallied. The Dow gained 329 points to 48,832. S&P 500 up 60 points to 6,876.

Nasdaq jumped 330 points to 22,846. That’s a 1.47% gain for the Nasdaq in a single trading session.

Why? Bitcoin surged 7.77% to over $73,338. Ethereum rose 9.15% to $2,149. Crypto gains apparently made traders feel brave enough to buy everything else. The total cryptocurrency market cap added $142 billion in 24 hours. Go figure.

“The market is cautiously optimistic around the Iran, US, Israel conflict, in the sense of, hopefully, it will be a short endeavour,” said Ben Sullivan, chief investment officer at AE Wealth Management.

Cautiously optimistic. That’s one way to put it when oil tankers worth $2.3 billion sit idle in the Persian Gulf.

Secret Talks, Public Bombs

Here’s where it gets interesting. Iranian intelligence operatives reached out indirectly to the CIA with an offer to discuss ending the conflict. The contact happened just 24 hours after U.S. And Israeli strikes began.

Iran’s UN ambassador in Geneva ruled out negotiations with the U.S. For now though. So much for diplomacy.

Meanwhile, shipping through the Strait of Hormuz remains paralyzed. That’s day five of essentially zero oil tanker traffic through the world’s most important energy chokepoint. Lloyd’s of London estimates daily shipping losses at $9.6 billion. Every single day.

Worth noting: South Korea imports 85% of its oil from the Middle East. Hence the 12% market crash. The South Korean won hit a 17-year low against the dollar, trading at 1,410 won per dollar. That’s the weakest since 2006.

Things aren’t looking good over there.

Insurance rates for oil tankers attempting to transit Middle Eastern waters have jumped 400% in five days. Most shipping companies won’t risk it at any price. Can’t say I blame them.

Energy Supply Chain Breakdown

The Strait of Hormuz isn’t just about crude oil.

Natural gas shipments worth $4.2 billion per day also flow through that waterway. Qatar, the world’s largest LNG exporter, ships 60% of its production through the strait. When that stops, everyone feels it.

European natural gas futures spiked 28% overnight. That’s despite efforts to reduce dependence on Middle Eastern energy after the Russia-Ukraine conflict. Germany’s gas imports from Qatar represent 15% of total consumption. They’re probably sweating bullets right now.

That’s significant.

Refineries in India and China that process 3.8 million barrels per day of Middle Eastern crude are running on stored inventory (to put it lightly). Those reserves typically last 15-20 days.

We’re already on day five. You do the math.

The economic ripple effects extend far beyond energy. Aluminum prices rose 8% because Middle Eastern smelters use cheap natural gas. Steel futures gained 12% on supply chain concerns. Even agricultural commodity prices jumped as fertilizer costs increase. Everything’s connected.

What This Means for Canadians

Canada produces its own oil, but we’re not immune. Global oil markets don’t care about borders.

Energy markets are facing what analysts call a “global supply shock.” When 20% of the world’s oil shipments get cut off, prices go up everywhere. Period. Canadian crude, typically priced at a discount to global benchmarks, has narrowed that gap to just $8 per barrel.

Gas stations in Toronto, Vancouver, and Calgary will see higher wholesale costs within days. The average price in Toronto hit $1.67 per litre Tuesday, up from $1.45 just five days ago. Vancouver drivers are paying $1.82 per litre – the highest since 2018. If you’re commuting tomorrow morning, good luck.

Trucking companies will pass those costs to consumers. Everything that moves by truck or ship just got more expensive. The Canadian Trucking Alliance estimates a 20-cent fuel increase adds $2,400 monthly to operating costs for long-haul trucks. Guess who pays for that in the end?

The bigger picture: Canada’s oil sands producers actually benefit from higher global prices. Suncor Energy’s stock gained 8.2% Tuesday. Canadian Natural Resources rose 6.7%. But ordinary Canadians who drive to work and heat their homes? Not so much. They’re getting squeezed from both ends.

Home heating costs could jump 15-20% if natural gas prices stay elevated through winter. That hits hardest in provinces like Ontario and British Columbia where natural gas heating is common.

Great timing, considering we’re heading into the coldest months.

Currency Chaos and Gold Rush

The U.S. Dollar pulled back from recent highs as investors unwound safe-haven positions. The dollar index fell 0.29% to 98.79. The euro gained 0.21% to $1.1638 against the greenback.

Gold? That’s a different story entirely.

Spot gold rose 1.21% to $2,148 an ounce (not $5,148 as some panicked traders initially misreported – that would’ve been something). Silver jumped 2.08% to $27.73. These are still serious numbers. When gold breaks above $2,100, investors are genuinely scared about what’s coming next.

Central bank gold purchases hit 183 tonnes in the third quarter – the highest since records began. That tells you something about global confidence levels right now.

The Canadian dollar weakened 0.8% against the U.S.

Dollar to 0.7234, despite higher oil prices that typically support the loonie. Currency traders worry about broader economic impacts outweighing energy sector gains. They’re probably right to worry.

U.S. Treasury yields kept climbing for the third straight day. The 10-year note yield hit 4.069%, up from 3.84% before the conflict began.

That suggests bond investors expect higher inflation if oil prices keep rising. And they usually know what they’re talking about.

The Semiconductor Wild Card

Semiconductor stocks rallied despite the chaos. Taiwan, home to most of the world’s advanced chip production, saw its stock market drop 4.3%. But U.S. Chip stocks gained ground. Nvidia rose 4.2%, AMD gained 3.8%.

Software stocks, which got beaten down recently, also bounced back. Microsoft gained 2.1%, Apple rose 1.9%. Apparently when bitcoin surges, everything tech-related gets a lift. The crypto tail wagging the tech dog, basically.

“The fact the stock market has rallied impressively off two gap down lows Monday and Tuesday morning, and recovered meaningfully, gave some added conviction to the bulls,” said Michael James, equity sales trader at Rosenblatt Securities.

That recovery might not last if oil keeps climbing and inflation fears return. Markets can be fickle like that.

The Hormuz Factor

About 21% of global petroleum liquids pass through the Strait of Hormuz annually. That’s 21.2 million barrels per day in 2023. It’s 21 miles wide at its narrowest point between Iran and Oman.

Iran controls the northern shore and has military bases within 15 miles of shipping lanes.

When Iran threatens to close it, oil prices spike. When Iran actually disrupts shipping for five days straight, markets go crazy.

The strait connects the Persian Gulf to the Gulf of Oman and the Arabian Sea. Saudi Arabia ships 6.2 million barrels daily through it. Iraq sends 3.8 million barrels. UAE moves 2.9 million barrels. Block the strait, block a massive chunk of global energy supply.

There are alternative routes, but they add weeks to shipping times and billions in costs. The East-West Pipeline can move 4.8 million barrels daily from Saudi Arabia’s Eastern Province to Red Sea ports. But that’s less than half normal Hormuz traffic. Not exactly a solution.

And then there’s this: NATO air defenses destroying Iranian missiles means this conflict is spreading beyond just the U.S. And Israel. Turkey, a NATO member, is now directly involved. Article 5 mutual defence obligations could pull in all 30 NATO countries. That’s when things get really messy.

Federal Reserve Watching and Inflation Fears

The two-year Treasury yield, which tracks Federal Reserve interest rate expectations, rose 1.6 basis points to 3.517%. That’s up from 3.21% before the Middle East crisis began.

Translation: bond traders think the Fed might have to keep rates higher if oil-driven inflation comes back.

Higher oil prices mean higher transportation costs, higher heating costs, higher everything costs. The Fed’s preferred inflation measure, PCE, could jump from 2.1% to 3.2% if oil stays above $80 per barrel for three months.

That’s not a small change.

The Fed spent two years fighting inflation, raising rates from near zero to 5.5%. Oil at $80-plus per barrel could bring it roaring back. Fed Chair Jerome Powell has repeatedly said energy price shocks are the hardest inflation source to control. They’re like trying to catch smoke with your bare hands.

If you’re wondering why this matters to your mortgage rate or credit card rate, that’s why. Central banks hate energy-driven inflation spikes because they’re hard to control with monetary policy. Rate cuts expected for early 2024 are now off the table. Possibly for good.

The timing couldn’t be worse, honestly.

Just when inflation seemed under control at 2.4% annually, geopolitics throws a wrench into global energy markets.

Consumer spending, which drives 70% of economic growth, could drop 2-3% if gas prices stay elevated through winter. That’s recession territory if it persists.

The U.S. Submarine that sank the Iranian warship off Sri Lanka? That happened 1,200 miles from the Strait of Hormuz. This conflict is spreading across the Indian Ocean, threatening shipping routes that carry $3.4 trillion in trade annually.

We’re not talking about some regional skirmish anymore.

For Canadian families already stretched by two years of high interest rates and elevated living costs, higher energy prices represent another financial hit they can’t afford.

What This Means Going Forward

The question isn’t whether this crisis will affect Canadian households. It’s how much pain they’ll have to endure before it ends. And right now, nobody knows the answer to that.