Strait of Hormuz closure drives oil shock and geopolitical risk premium

The Middle East conflict has triggered a structural shift in commodity and macro markets. Trump rejected Iran's latest peace proposals, describing the ceasefire as on "massive life support." The Strait of Hormuz, through which roughly one-third of seaborne traded oil flows, remains effectively closed. Aramco estimates a 100 million-barrel weekly loss, with some traders believing the shutdown could persist through year-end, an unprecedented scenario not seen since WWII.

Commodity shipping giant Norden is planning for a full-year Hormuz closure, highlighting how corporates are internalizing tail risk. Oil tankers that exited the Persian Gulf are stalling in the Gulf of Oman, unable to proceed. Peru authorized a $2 billion private bailout for state oil firm Petroperu amid the liquidity crisis. At the same time, India is considering emergency measures to shore up foreign-exchange reserves, including curbing non-essential imports like gold and electronics, and hiking fuel prices. The supply shock is rippling across borders.

Markets are pricing both inflationThe rate at which prices rise across an economy. and recession risk. Gold has held near record highs as geopolitical uncertainty sustains safe-haven demand. Copper has steadied near record closes despite Trump's rejection of Iran's peace offer. Energy importers face margin compression; defense contractors and gold miners benefit. The European Central Bank, Bank of England, and Federal Reserve are all grappling with imported inflation that complicates rate-cut decisions. Japan's foreign currency reserves showed little intervention activity in April, suggesting the BoJ was waiting for clarity on the conflict.

The base case assumes a 6- to 12-month resolution and a gradual return to normalized supply flows. If escalation occurs, direct US-Iran military conflict, closure of additional chokepoints, energy prices could spike 30-50 percent higher, triggering demand destruction and potential recession. If de-escalation happens quickly (within weeks), the shock could fade just as rapidly. The risk asymmetry is skewed toward persistence; geopolitical standoffs tend to outlast initial expectations.