How to Price the Risk of the Potential Strait of Hormuz Closure? Oil Rises 10%, Tanker Rates Surge 40%!

TradingKey - As tensions between Israel and Iran escalate, U.S. President Donald Trump’s call for Iran to "surrender unconditionally" has further raised concerns about potential U.S. military involvement. While crude oil prices have risen around 10% since Israel's airstrikes on Iran last Friday, market concerns over the risk of a Strait of Hormuz closure are even greater — and tanker markets are pricing in far more extreme scenarios than oil futures.

As of writing (June 18), WTI crude oil was trading at $73.11 per barrel, up about 10% since the start of the conflict.

On June 17, Trump heightened fears of direct U.S. intervention by stating that the location of Iran’s Supreme Leader was known and urging Iran to surrender immediately.

Analysts at Pepperstone noted that news of potential U.S. involvement could push oil prices above $80 per barrel. The shape of the oil futures curve also suggests investors are beginning to price in tighter supply conditions.

While Goldman Sachs attributes the rise to short-term geopolitical shocks, and forecasts oil may rise to $90 per barrel before falling back to $60 by Q4, an increasing number of market participants are focusing on the larger strategic risk: a potential closure of the Strait of Hormuz, through which one-fifth of global oil and LNG shipments pass.

Tanker Market Prices in the Risk More Than Oil Markets

Compared to oil prices, which have risen about 10% and then stalled, tanker freight rates have surged dramatically, reflecting deeper concerns over supply chain disruptions — something that has no historical precedent.

Since June 13, the benchmark daily rate for Very Large Crude Carriers (VLCCs) transporting oil from the Middle East to China has jumped by over 40%, and rates for routes from West Africa to China have also risen by more than 40%.

According to analysts at LSEG, tanker freight rates are expected to continue rising in the coming days.

Reuters reported that current oil prices suggest the market is still largely discounting such extreme scenarios, but trends in the oil tanker market show that oil shipping activity is being impacted even without direct action by Tehran.