Trump's Optimism Briefly Eases Market Tensions

President Trump’s remarks on Tuesday expressing optimism about a swift end to the U.S. conflict with Iran provided a temporary boost to financial markets. The comments helped to ease global oil prices and spurred stock market gains. However, economists warn that this positive sentiment is contingent on Iran reopening the strategically vital Strait of Hormuz.

Strait of Hormuz: The Key to Price Stability

Potential for Soaring Oil Prices

Economists emphasize that sustained optimism will quickly fade if Iran doesn’t agree to reopen the Strait of Hormuz. Nobel Prize-winning economist Paul Krugman warned on CBS News, “The scary scenarios are, unfortunately, extremely plausible. It’s not at all hard to tell a $150 story, and it’s not crazy to go to $200.” A prolonged closure could drive crude prices significantly higher, even with a potential drawdown of U.S. military operations.

Gasoline Prices on the Rise

U.S. gasoline prices, directly linked to global oil prices, are already climbing. Bernard Yaros, lead U.S. economist at Oxford Economics, stated that prices could surpass $4 a gallon if the strait remains closed. The average gas price reached $4.06 a gallon on Wednesday, the highest since August 2022.

Presidential Address and Market Expectations

President Trump is scheduled to address the nation on the Iran conflict Wednesday night. Energy experts anticipate that oil and gas prices will react to his statements. Patrick De Haan, a petroleum expert at GasBuddy, noted, “If the president just foregoes providing clarity or resolution on the Strait of Hormuz, we’re going to continue to see oil prices reacting to the reality.”

Potential Price Peaks and Declines

De Haan predicts the average U.S. gas price could reach $4.12 to $4.15 per gallon. However, he added, “if the president says good things tonight, then that $4.12 to $4.15 would likely represent a short-term price peak. And then the national average could start falling.” Earlier on Wednesday, President Trump indicated Iran desires a ceasefire, but he also suggested the U.S. could end operations without reopening the strait.

Disruption to Shipping in the Strait of Hormuz

Increased Iranian Control

Since the beginning of the conflict in late February, over 70% of ships transiting the Strait of Hormuz have been owned by or linked to Iran, or traveling between Iranian ports, according to Lloyd's List Intelligence. Normally, approximately 20 million barrels of oil flow through the strait daily, but this volume has decreased by as much as 16 million barrels due to the ongoing conflict.

Economic Implications of a Prolonged Closure

Economists highlight the lack of readily available oil substitutes and the ‘inelastic’ nature of crude demand. Bridget Payne, head of oil and gas forecasting at Oxford Economics, anticipates oil prices exceeding $150 a barrel within weeks if the strait remains unsafe. Matt Bernstein, an oil and gas analyst at Rystad Energy, believes oil prices will remain elevated even with a swift U.S. withdrawal, citing increased geopolitical and financial risks in the Gulf.

Long-Term Outlook and Consumer Impact

Even if the conflict de-escalates and the strait gradually reopens, Bernstein suggests a return to pre-war conditions is unlikely. Payne emphasized that the impact on consumer prices will worsen the longer oil supply remains constrained, despite efforts by the Trump administration to boost supplies. Roughly a fifth of the world’s oil and natural gas supply passes through the Strait of Hormuz daily.