Moneycontrol Pro Panorama | Dire strait

The only circumstance that may prompt Iran to close the Strait of Hormuz is the apprehension that its current regime is on the verge of collapse.

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The United States’ heavy duty bombing on three of Iran’s nuclear facilities over the weekend may have worsened the geopolitical equations between nations. But it has done little to weigh down financial and commodity markets significantly. On the contrary, global equity indices, currency exchange rates, commodity prices such as oil and even the safe-haven assets such as gold and silver continue to yo-yo nervously since Israel’s attack on Iran’s nuclear sites a few days ago.

At this point, all eyes are on the Strait of Hormuz -- a mere 33-km-wide sea passage -- that presumably holds global oil supply at ransom. Today’s Chart of the Day details what a blockade by Iran means for oil prices and the world economy, but the decision on closure is left to Iran’s Supreme National Security Council, led by Ayatollah Khamenei.

However, the markets are also aware that Iran has never implemented the blockade even during the worst of such times in the past. In the current context, a full closure would harm Iran’s own economy, given that it relies on the waterway for its oil exports — 96 percent of its exports, and the potential Chinese backlash that accounts for 90 percent of Iran’s oil exports.

As global leaders, economists and investors grapple with this uncertainty, what’s clear is that the fallout is unpredictable. This FT article (available only to MCPro subscribers) highlights the possible scenarios that could unfold. One, Iran backs off and is willing to negotiate with US and Israel -- a feather in President Donald Trump’s cap. But this looks like the least probable in the near term.

Two, if the Strait is closed and stays shut for an extended period, then oil prices may rise and stay higher pulling down global growth. Also, it would be a risk to inflation too, stymying rate cuts by the US Fed.

Indeed, a closure of the Strait would put global supply chains at risk and push down global growth even from the recently lowered forecasts.

To be sure, India’s policymakers seem less worried, citing diversification of the country’s oil imports and sufficient buffer stock to weather temporary supply disruptions. Furthermore, India’s trade share with both Iran and Israel is restricted to cereals, fruits and nuts. My colleague Madhuchanda Dey writes here that a prolonged conflict leading to high costs could see the domestic demand recovery skid. “We could see downward revision to India Inc’s FY26 estimates,” she says.

That said, the above possibilities are all linked to how the war ends. In his column, Saibal Dasgupta brings forth the diverse signals that the US intervention in the Middle-East has sent across the world. The US, under President Trump, is willing and capable of taking drastic action if its demands are ignored. It has raised questions about whether China and Russia would try to save the Ayatollah regime. As some forecast, the only circumstance that may prompt Iran to close the Strait of Hormuz, for the first time, is the apprehension that its current regime is on the verge of collapse.

Global financial market veterans concede that equity investors, particularly under-allocated to equities, must use the market downsides as an opportunity to buy and rebuild portfolios.

The Iran-Israel-US war brings to mind the song 'Brothers in Arms" by the rock band Dire Straits link to the song that ends as follows

'And every line in your palm
We're fools to make war
On our brothers in arms' 

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