Negotiations between the US and Iran are apparently still ongoing, yet the Strait of Hormuz remains closed, keeping the energy crisis very much alive and prompting countries to take action.
Most recently, Indian Prime Minister Narendra Modi urged citizens to reduce fuel consumption and avoid unnecessary travel to limit import costs and protect the country’s foreign exchange reserves. Earlier, the European Commission also called on EU member states to consider reducing oil and gas consumption, particularly in the transportation sector.
Yet oil prices are no longer climbing. In fact, the market has started to normalize: physical oil premiums, which surged to as high as $28 per barrel during the peak of the crisis, have collapsed back near pre-crisis levels, falling to around $2.15.
Why is that?
It’s not that there’s suddenly more oil on the market, but that demand has simply become more restrained. Countries are tapping into their strategic reserves in the hope that the conflict will end sooner rather than later. The problem is that these reserves are not unlimited — according to JPMorgan, inventories could reach “operational stress” levels by early June.
That means if the Strait of Hormuz remains closed through next month, pressure on oil prices could quickly return. But judging by the S&P 500 and Nasdaq, both of which continue to hit fresh record highs, investors seem to believe the situation will stabilize soon.
Now, if the crisis doesn’t improve and actually gets worse, the Bab el-Mandeb Strait, together with the Hormuz Strait, could be paralyzed. Inflation risks would rise, pressure on the markets would increase, and it’s unlikely that one simple tweet could reverse the mood this time.
For instance, even gold might not perform as the ultimate safe haven in such a scenario. If investors begin pricing in additional Federal Reserve rate hikes, capital could shift toward higher-yielding assets instead.
Summing up, the reason oil still isn’t trading at $200 per barrel is that major importers are relying on strategic reserves to make up for supply disruptions. Traders are also betting that the conflict will eventually be resolved.
But if the situation doesn’t improve over the coming weeks and markets get nothing more than optimistic statements and headlines, volatility could return, affecting even the market’s major drivers, including semiconductor companies. After all, the Strait of Hormuz is a key route for helium exports, and helium is still essential for advanced chip manufacturing.