The U.S. and Israel launched a major attack on Iran Saturday, with implications for global financial and commodity markets. Much will likely depend on the fate of ship traffic through the Strait of Hormuz, the world’s busiest waterway for global oil shipments and a key chokepoint for fertilizer shipments.
Spikes in oil prices have tended to be a positive for grain and oilseed futures, particularly soybean oil and wheat, as well as agricultural commodities more broadly.
President Donald Trump announced early Saturday morning that he had launched Operation Epic Fury, to keep Iran from obtaining a nuclear weapon. He called on Iranians to rise up and take control of their government.
Iran retaliated by firing a barrage of missiles and drones at Israel and U.S. bases throughout the region, including facilities in Qatar, Kuwait and the U.A.E, the Wall Street Journal reported. The U.S. military intercepted multiple Iranian missiles, though an Iranian strike on a U.S. military base in Bahrain damaged facilities. Trump, in a social media post Saturday afternoon, said the attack had killed Iran Supreme Leader Ayatollah Ali Khamenei.
Market implications
The strait, located between Oman and Iran, is a narrow waterway that links the Persian Gulf with the Gulf of Oman and the Arabian Sea. At its narrowest point, the Strait of Hormuz is only 21 miles wide, and the width of the shipping lane in either direction is merely two miles.
Around 20 million barrels of crude a day move through the strait, equivalent to around 20% of global consumption, according to the U.S. Energy Information Administration. Around 80% of those flows go to Asia. About a fifth of global liquefied natural gas (LNG) trade also flows through the waterway.
Often overshadowed, the strait is also a chokepoint for fertilizer shipments. The strait represents 25% to 35% of traded ammonia and urea, noted analysts at Scotiabank.
Iran itself pumps up to around 3.5 million barrels a day of crude, around 3% of world supply, much of it destined for China.
- Depending on how events play out ahead of the open for markets Sunday evening, oil futures could be on track for a spike higher after May Brent crude, the global benchmark, rose 2.9% Friday to end at $72.87 a barrel. Brent has rallied nearly 20% since the beginning of the year, due in large part to rising fears of a conflict.
- At the same time, a potential oil shock would be a negative for global stock markets and other assets perceived as risky while sparking a further round of buying for assets perceived as safe havens, including gold and U.S. Treasuries.
- Bitcoin, which trades 24/7, initially plunged in a risk-off reaction to the joint attack by the U.S. and Israel early Saturday morning, but was trading higher after reports of Khameini’s death. The cryptocurrency often serves as a proxy for global risk appetite.
The link between oil volatility and ag commodities
David Whitcomb, head of research at Geneva-based Peak Trading Research, highlighted the relationship between crude-oil volatility and ag futures in a Saturday note.
“If Crude gaps higher on Monday, upside volatility across the commodity complex is likely,” he wrote.
Peak Trading found that in the 30 sessions over the past five years where crude oil rallied 4% or more, the broader commodity complex followed higher, with wheat and soybean oil showing the strongest co-movement in the agriculture complex (see chart below).
Bloomberg reported that oil and gas tankers are avoiding the strait, with some vessels holding outside the waterway and others turning away. Reports said ships have heard a radio broadcast from the Iranian navy declaring the strait closed.
Strait scenarios
Actually closing the strait, however, is seen as a tall order, particularly given a huge U.S. naval presence in the area. Such a move would also be detrimental to Iran itself, which relies on crude shipments to Asia for revenue.
But analysts note that desperation could prompt Iran to take more extreme action.
Bridget Payne, head of energy forecasting at Oxford Economics, said in a note to clients ahead of the attacks earlier this past week that the potential for disruption in the strait is on a sliding scale, and more likely to take the form of targeted attacks and interference than a complete closure. That would make for reduced energy flows rather than a complete halt, while alternative supply and pipelines, as well as storage drawdowns, would provide a buffer.
“A severe disruption is unlikely to be sustained as that would require Iran to maintain an unprecedented naval blockade and defend against the rapid military, economic, and diplomatic response it would provoke from major powers,” she wrote. “We would therefore expect the market impact to be short-lived and for trade and prices to quickly recover.”
Oxford Economics sees Brent crude trading around $84 a barrel while Strait transit is disrupted, representing a modest supply loss that can be largely offset. At the same time, the messy geopolitical situation that’s almost certain to follow will likely keep a floor under prices through 2026, Payne said, with Brent likely averaging $79 a barrel over the second quarter, $13 above the firm’s baseline forecast.
Tail risk
The tail risk is a severe disruption that sees Iran effectively halt transit through the strait fo rup to a week, the analyst said. Although unlikely, this scenario becomes plausible if the regime sees its survival at stake. It would likely involve damage to Iranian oil infrastructure.
“We estimate the net supply impact of effective Strait closure is around 11 million barrels per day accounting for alternative pipelines, demand destruction, and the US supplying at full capacity,” Payne wrote.
The result would be an immediate surge in global oil and gas prices, with crude jumping to $140 a barrel and liquefied natural gas prices quadrupling above $40 per million British thermal units as buyers scramble for replacement cargoes, she said, making for a shock similar to the immediate aftermath of Russia’s invasion of Ukraine.
The situation remains fluid. A rapid conclusion to the conflict could spark a round of market relief, though geopolitical uncertainty would likely linger.