The Hormuz Shock Is Far From Over

The latest data from Bloomberg indicates that the disruption of shipping through the Strait of Hormuz persists, despite recent reported progress between Iran and Oman. Brent crude futures are currently trading around $85 a barrel, as markets gauge the likelihood of an imminent deal to reopen the crucial maritime passage. However, global supply-chain stress levels remain elevated, nearing their peak since the pandemic, and the resumption of shipping traffic may not bring relief for months.

UBS senior international economist, Pierre Lafourcade, emphasized this through his bank's Global Supply Chain Stress Index. Although the index showed a slight improvement in July compared to its pre-pandemic level, disruptions due to the Hormuz chokepoint continue to strain global shipping networks. The median reading of the index decreased by 0.4 standard deviations since June but stayed 0.9 standard deviations above the pre-Iran conflict period.

Similarly, the average reading dropped by 0.3 standard deviations since June, yet remained 1.35 standard deviations above February, prior to the US-Iran conflict. Lafourcade further noted that while there is some marginal relief for supply chains relative to the June peak, the July data still indicates that the stress remains significantly higher than pre-conflict levels.

Despite markets' optimism about an imminent resolution, as evidenced by the 20$ drop in Brent crude since the July 23 peak, supply chain stress is expected to persist, even after any implemented agreement. The indicator, which captures the supply shock nature of the Hormuz bottleneck, primarily reflects seaborne oil and gas flows and shows that all other components indirectly reflect the shock.

Oil and gas shipping volumes in the Asia region, represented in Figure 4, have nearly recaptured half of the drop since the Strait closure. However, global volume of other cargo shipping has remained relatively stable. Delivery times have improved in Asia, excluding China, but worsened in the US. The most significant relief is seen in lower air-freight costs in July, while shipping costs have increased again across major reporting agencies, including Baltic, Harper Peterson, Drewry, and Freightos.

As the Hormuz chokepoint continues to disrupt global supply chains, concerns about higher energy and freight costs, depleted inventories, longer delivery times, and renewed inflationary pressure remain ongoing issues.