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In an unfolding global economic scenario, oil prices experienced a surge in early trading on Sunday, triggered by the United States’ announcement of a blockade on Iranian ports starting Monday.
U.S. crude oil saw an 8% increase, reaching $104.24 per barrel, while Brent crude oil, recognized as the global benchmark, climbed by 7% to $102.29 per barrel.
The Brent crude market has been notably volatile amidst the ongoing conflict involving Iran. Prices have fluctuated significantly, peaking over $119 per barrel at times. This is a stark contrast to its pre-war pricing of approximately $70 per barrel back in late February. Last Friday, anticipation of peace talks led to a dip, with Brent crude for June delivery decreasing by 0.8%, settling at $95.20 per barrel.
Iran’s strategic position has allowed it to maintain control over the Strait of Hormuz, a crucial conduit for international oil shipments.
The U.S. Central Command has clarified that the impending blockade will be applied impartially, affecting vessels from all nations that attempt to enter or exit Iranian ports and coastal regions. This measure encompasses all Iranian ports situated along the Persian Gulf and Gulf of Oman.
It said it would still allow ships traveling between non-Iranian ports to transit the Strait of Hormuz.
Around a fifth of the world’s traded oil typically flows through the Strait of Hormuz every day. Saudi Arabia, Iraq, the United Arab Emirates, Kuwait, and Iran are all major exporters.
Traffic in the strait has been limited even in the days since the ceasefire. Marine trackers say over 40 commercial ships have crossed since the start of the ceasefire.
Claudio Galimberti, chief economist of Rystad Energy, said the blockade will raise prices but might move the needle on talks.
“It means the oil markets will be even tighter than before,” he said. “However, I think this is a negotiation tactic, which eventually resolves into a full opening of Hormuz. So, more pain now, but more gain later.”
However, Jim Krane, Energy Research Fellow at Rice University, said the blockade might be effective as a long-term strategy to impose pain on the Iranian economy, but it isn’t a good short-term negotiating tactic when the oil market is already under strain.
“If the deficit to the oil market takes another jump it is going to impose pain on every person on Earth that’s subject to market oil prices,” he said.