Oil: Blockade keeps upside inflation risks elevated – MUFG

MUFG’s Derek Halpenny links the prolonged Strait of Hormuz closure to rising Oil and input costs, with agricultural and fuel prices already surging. Halpenny assumes crude Oil averages USD 115 in Q2, lifting US inflation toward 3.8% later this year. This scenario threatens to increase global market volatility and pressure central banks to respond more aggressively.

Hormuz closure and crude price assumptions

"The focus now is fully on the Strait of Hormuz and pressuring Iran into shifting its position. However, Iran knows there is a time limit for the US as well and the inflationary impact of the closure will have a US and global impact that will be damaging for President Trump."

"The risk must be that Iran’s tolerance for pain will be considerable and in that regard this stalemate could drag on to the extent that crude oil prices soon hit new highs and create greater financial market volatility."

"The FT ran a great article yesterday highlighting the impact on the agricultural sector in the US where record price increases are being recorded for certain products. The price of nitrogen fertiliser is up more than 30% while urea (a nitrogen-based fertiliser) is up 47%, a record rise. Farm diesel is up 46% and these price changes will inevitably soon start to impact the price of food for consumers."

"These prices are likely to get worse over the coming weeks if the Strait of Hormuz remains closed – our assumption based on crude oil prices average USD 115pbl in Q2 would see annual inflation pick up to around 3.6% in Q2 to 3.8% in Q3 and Q4 this year. The impact on refined fuels and fertiliser prices could mean these estimates are too low."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)