We are in the sixth week of the Iran war, with the Strait of Hormuz operating at less than 10% of its pre-war flow rate, resulting in extremely tight oil markets. While Brent oil futures suggest a price around $100 a barrel, Saudi Aramco is charging a 20% premium on deliveries to Asia, while diesel trades about 100% and jet fuel about 130% higher in Asia.
South Africa saw its first significant price increase for diesel, and a lesser price increase for petrol this month, partly thanks to a cut in the fuel levy. If the war does not end soon the May diesel price hike will be greater than the April hike. While passenger vehicles are mostly fuelled by petrol, the economy runs on diesel. About half the Transnet train fleet, all transport trucks and all mining excavators and dump trucks run on diesel. It is important for everyone that the war ends soon.
Fortunately, hope of a ceasefire increased this week when US President Donald Trump said the US and Iran had agreed to start an immediate 14-day ceasefire, with imminent peace negotiations to follow.
Trump stated in a Truth Social post that Iran had delivered a 10-point plan which would act “as a workable basis on which to negotiate” and “almost all the various points of past contention have been agreed to between the US and Iran”. In return, Iran would immediately reopen the Strait of Hormuz and negotiation teams would meet in Pakistan to attempt a lasting peace deal.
The ceasefire announcement was a significant surprise to market. A very one-sided Iranian 10-point plan released later by the supreme national security council of Iran seemed more like a US surrender. It would leave the current Iranian regime intact, Iran unsanctioned with its frozen offshore funds returned, free to enrich uranium, and with a revenue-collecting Strait of Hormuz toll booth. A detrimental outcome for the US, and scarcely unbelievable.
The resolve of both sides is about to be tested. What happens if a deal is not done? Then we could see the steepest escalation to date
Behind the scenes the Iranians requested US vice-president JD Vance be the lead negotiator on behalf of the US as he was against the war and thus had more credibility than previous negotiators. Iran also sees him as a potential 2028 presidential candidate, which could provide durability to any agreement.
How is the ceasefire progressing? Trump has since denied the one-sided Iranian 10-point plan was the same as the one referred to in his Truth Social post.
Iran apparently believed all aggression against its proxies would halt under the ceasefire, whereas Israel has continued to bomb Lebanon. Iran threatened the US and Israel hours later that it would close the strait and withdraw from the ceasefire if Israel did not stop attacks on Lebanon.
Iran then proceeded to close the Strait. Meanwhile, the United Arab Emirates is suspected of attacking air defences on an Iranian island, Israel continues to attack Lebanon, and Iran bombed the largest oil facility in Saudi Arabia, and the world, on Thursday night.
In short, it is not going well. Even so, Pakistan, Egypt, Oman and Türkiye continue to push both sides to advance towards a diplomatic solution, while Gulf countries wonder if they will be left to contend with a toll booth through the strait.
The resolve of both sides is about to be tested. What happens if a deal is not done? Then we could see the steepest escalation to date. Iran could be expected to expand attacks on Saudi and regional oil facilities, including Saudi’s east-west Pipeline, which redirects 5% to 7% of global oil to the Red Sea, while the Houthis in Yemen could join Iran and close the Bab Al Mandeb Strait at the bottom end of the Red Sea. The latter would be a significant step-up in hostilities and vastly expand the global oil shock.
The Strait of Hormuz needs to reopen to at least half its pre-war tanker flow, which would see shut-in oil fields reopen over coming weeks
Gulf countries could join the fight, while the US and Israel would undoubtedly continue and expand their bombing campaign in Iran. The US could make a run for Kharg Island, attempting to take control of 90% of Iran’s oil exports. It would be a risky proposition.
Oil prices on our screens would be significantly higher than they are currently, and shortages of diesel, petrol, jet fuel, fertiliser, helium and sulfuric acid would spread.
How does it de-escalate? China needs to push Iran to continue the peace process while the US holds to its end of the bargain. A mutual understanding needs to be reached with regard to Iranian proxies, specifically Lebanon. The negotiation teams must meet and work towards a mutually acceptable solution. The position of Gulf countries needs to be considered in the process.
The Strait of Hormuz needs to reopen to at least half its pre-war tanker flow, which would see shut-in oil fields reopen over coming weeks. Inflation will still rise for months to come, and then settle down. Supply chains would take months to stabilise.
The cost of oil is currently about 3% to 4% of global GDP, and previous oil shocks saw economies enter recession when oil costs hit 4% to 5% of global GDP. The current shock is hurting, but not yet disastrous. However, escalation must be avoided at all costs.
It is beneficial for China and its large export manufacturing sector to prevent a global recession by pressuring Iran to continue negotiations to de-escalate and, most importantly, to reopen the Strait of Hormuz.
The oil must flow. South Africa needs a strategic reserve of diesel, jet fuel, petrol and paraffin to cushion the blows of a more volatile multipolar world.
• Van Rensburg is a strategist at All Weather Capital.
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