The Iran war and oil markets: the Hormuz question

The Iran war and oil markets: the Hormuz question

Part 3 of a Series

March 29, 2026 Felipe Elink Schuurman CEO and Co-Founder, Sparta Commodities

1. One month in: the war that cannot end

Thirty days ago, US-Israeli strikes against Iran began what the administration described as a limited military operation to dismantle Tehran’s nuclear programme. One month later, the conflict has metastasised into the most consequential energy crisis since the 1973 Arab oil embargo, and arguably the most complex geopolitical confrontation of the twenty-first century.

The week ending March 28 crystallised a hard truth that markets are only beginning to internalise: there is no quick exit from this war. The US proposed a 15-point ceasefire plan requiring Iran to dismantle its nuclear programme, end enrichment, hand over its uranium stockpile, cease support for allied militias, and guarantee freedom of navigation through the Strait of Hormuz. Tehran rejected it within hours, calling it “maximalist and unreasonable.”

Iran countered with five conditions of its own: an immediate end to hostilities, concrete guarantees against future attack, war reparations, the closure of all US military bases in the region and, most significantly, international recognition of Iran’s sovereignty over the Strait of Hormuz. This last demand is the one that should keep oil traders awake at night.

Several of the world’s most prominent geopolitical thinkers have converged on the same conclusion: this war has no clear path to the outcome the US and Israel envisaged when they launched it.

John Mearsheimer has been the most blunt, arguing that the US has effectively already lost. His core thesis is that the conflict has become a war of attrition, precisely the kind of protracted engagement that Iran prepared for and that the US did not. Iran’s asymmetric capabilities, the ability to close Hormuz, to threaten Gulf infrastructure including desalination plants, and to sustain a drone war indefinitely, mean that conventional military superiority does not translate into victory. Mearsheimer’s assessment is that nobody can tell a plausible story about how this war ends, and that Trump would like to find an off-ramp but simply cannot locate one.

Ian Bremmer frames the problem differently but arrives at a similar place. He characterises this as a “war of choice” and argues that while Iran’s nuclear ambitions and ballistic missile programme posed real threats, the decision to pursue regime change dramatically raised the stakes beyond what the original objectives justified. Bremmer highlights the mounting costs, oil above $100, rising global energy prices, regional instability, the Pentagon requesting an additional $200 billion, and the political irony that Trump, whose brand was built on ending America’s “forever wars,” now presides over a conflict with no visible endpoint. His assessment of regime change is particularly stark: even as the US and Israel degrade Iran’s conventional military, its asymmetric capabilities remain largely intact, meaning the conflict could drag on well beyond any formal cessation of hostilities.

Jeffrey Sachs has gone further, describing the conflict as “inherently irrational” and warning that it could lead to a wider confrontation. His critique centres on what he sees as Washington improvising under pressure, reacting to battlefield developments without a coherent long-term strategy. The original assumption was that a decisive strike could reshape the situation in Iran. That assumption has proven wrong, and Sachs argues that the US now finds itself pursuing regime change in a country where such efforts have historically failed, while simultaneously alienating allies and destabilising the global economy.

Let us not forget that two countries initiated this war: the US and Israel. Given the intelligence they had before the strikes, both expected a quick resolution and their interests were aligned. Now that this will clearly take months to resolve, despite it being too big to fail, we see a divergence in objectives and red lines between the US and Israel. For Netanyahu, this is existential. Trump must manage the economic and political consequences for the US and GCC allies, while also managing Netanyahu’s ambitions. This makes any resolution considerably more complicated.

The only long-term resolution will be a negotiated truce principally through GCC intermediaries, Qatar and Oman. That is where the real signal will eventually come from, as distinguished from the noise of public posturing. It may not be happening yet. But if we want to see an end to this conflict, that is how it happens.

2. The Hormuz question: from strait to toll booth

Of all the developments in the past week, Iran’s demand for sovereignty over the Strait of Hormuz deserves the most careful analysis because it is the one with the longest tail.

What Iran is proposing is, in effect, the conversion of the world’s most important oil chokepoint into something resembling the Suez Canal: a passage under sovereign control, with transit fees, a vetting regime, and the ability to deny access to unfriendly nations. This is not a theoretical exercise. It is already happening.

Iran’s parliament is actively drafting legislation to formalise sovereignty, control, and oversight of the Strait. The IRGC has implemented a “toll booth” system requiring vessels to enter Iranian waters and submit to vetting before transit. In the past two weeks, 26 vessel transits have followed pre-approved IRGC routes. Iran is reportedly charging $2 million per tanker and while the current trickle of roughly 10 ships per day generates approximately $20 million daily, the scale of what Iran is really trying to build is far larger.

Before the conflict, approximately 138 to 151 ships transited Hormuz daily, including oil tankers, LNG carriers, and commercial vessels. At $2 million per ship, full-capacity toll revenues would reach $275-300 million per day, or $8-9 billion per month, an order of magnitude above what the Suez Canal generates ($700-800 million per month). Even applying the fee only to oil and LNG tankers, roughly 30 to 40 loaded vessels per day, the potential revenue of $1.8-2.4 billion per month would be roughly three times the Suez.

More importantly, Iran is choosing who passes. Ships from China, Russia, India, Iraq, and Pakistan have been granted access. Malaysia and Thailand were added after bilateral talks. As of March 28, Pakistan secured approval for 20 additional ships under Pakistani flag, two per day. Everyone else waits.

US Secretary of State Marco Rubio called this “illegal, unacceptable, and dangerous to the world.” The GCC secretary general described it as “an aggression and a violation of the UN Convention on the Law of the Sea.” They are right on the law. But the law is not setting prices.

The question the market must ask: can this be weaponised?

The Suez Canal is the most relevant precedent and the history is not reassuring. Egypt closed the Suez in 1956 after Nasser nationalised the waterway, shutting it for five months until US and Soviet diplomatic pressure forced a resolution. Far more consequential was the second closure: in June 1967, Egypt shut the Suez Canal at the start of the Six-Day War. It remained closed for eight years until June 1975. Fifteen ships from eight countries were physically trapped in the Great Bitter Lake for the entire period. The closure forced a complete restructuring of global oil shipping, catalysed the construction of supertankers, and permanently altered trade routes.

If Iran formalises Hormuz control as a condition for peace, the geopolitical risk premium in oil never fully unwinds. Every future diplomatic spat, every sanctions dispute, every regional conflict becomes a potential trigger for selective closure. This demand is not a starting position in a negotiation. It is a provocation, and a sign that Iran is preparing for a longer confrontation, not seeking a way out.

Will the GCC and US accept this?

This is where the Hormuz demand risks becoming a non-negotiable that escalates rather than resolves the conflict. The GCC states, Saudi Arabia, the UAE, Kuwait, Qatar, Bahrain, have their economic lifelines running through that Strait. Saudi Arabia’s East-West pipeline is now pumping at its full 7 million $b/d$ capacity to bypass Hormuz, with an additional 700-900 kb/d of products, but that is the limit. It is a fraction of what these nations collectively need to export.

If Iran insists on Hormuz sovereignty as a precondition for peace, the GCC has every incentive to support a military solution rather than accept permanent Iranian control over their primary export route. The US appears to be preparing exactly that option.

3. The ground troops are coming: will they act?

The Pentagon has ordered approximately 2,000 soldiers from the 82nd Airborne Division to the Middle East, including Maj. Gen. Brandon Tegtmeier and division staff, a division-level command structure that signals preparation for significant operations, not just deterrence. This is in addition to two Marine Expeditionary Units: the Tripoli Amphibious Ready Group (which arrived in the CENTCOM area on March 27) and the Boxer Amphibious Ready Group (expected mid-April). Combined, nearly 7,000 additional troops have been deployed since the conflict began.

Iran is not idle. Reports indicate that Tehran is fortifying Kharg Island – the loading point for 90% of its crude exports – with anti-personnel and anti-armor mines on shorelines where US troops could stage an amphibious landing. Additional air defences and military personnel have been moved to the island.

Trump has paused energy infrastructure strikes by ten days to April 6, claiming talks are “going very well” despite the absence of any direct negotiations, Iran has publicly denied any contact. But the pattern of Trump’s extensions may be less about negotiation and more about buying time for military assets to reach position. The Easter weekend and the days immediately following it represent a critical window.

The deployment of ground troops is the most consequential signal for oil markets, not because of what it means for Iranian exports specifically, but because of what it means for the conflict’s duration and trajectory. Ground troops represent another step up the escalation ladder. They signal a longer war, a deeper commitment, and a narrowing of exit ramps. Even a limited operation, the seizure of Kharg Island, for instance – transforms this from an air campaign into an occupation, with all the logistical, political, and military complexity that entails.

For a crude oil market that is still pricing a return to normalcy in the forward curve, this is the signal that should force a repricing. Ground troops do not deploy for weeks. They deploy for months. And once they are on the ground, the political cost of withdrawal without a clear victory becomes enormous. The forward curve should reflect this. It does not.

4. The Houthi wildcard: could Bab al-Mandab be next?

Yemen’s Houthis entered the war on March 28, firing ballistic missiles at Israel and declaring that attacks would continue “until the aggression against all fronts of the resistance ceases.” This was expected. What should concern markets more is what comes next.

Iran’s control of the Strait of Hormuz has been devastatingly effective, not because of the toll revenue, but because of the global economic pressure it creates. The closure has sent oil prices surging, forced growth forecast revisions worldwide, put enormous political pressure on both Trump and Netanyahu, and divided the international community between nations with access and those without. It has given Iran leverage that no amount of US airpower has been able to neutralise.

The Houthis are watching and learning. The Houthi Information Minister stated on March 29: “We are considering closing the Bab al-Mandab Strait.” This is not an empty threat. The Houthis demonstrated throughout 2024-2025 that they can effectively disrupt Red Sea shipping with relatively basic missile and drone capabilities. A deliberate blockade or selective toll system at Bab al-Mandab, modelled on Iran’s Hormuz playbook – would compound an already severe crisis.

What happens if both straits close?

The economic impact would be global and immediate. Approximately 20% of the world’s oil passes through Hormuz and roughly 10-15% of global maritime trade passes through Bab al-Mandab. A simultaneous closure or severe disruption of both chokepoints would effectively sever the maritime connection between the Atlantic Basin and Asia via the most direct routes.

For Asia, the consequences would be catastrophic. The continent is already in desperate need of oil and refined products, with refineries cutting runs, countries imposing export controls, and multiple nations declaring force majeure. The remaining supply lifeline runs from the Atlantic Basin, US Gulf Coast, West Africa, Latin America, through either the Suez Canal and Red Sea (via Bab al-Mandab) or directly around the Cape of Good Hope.

If Bab al-Mandab is closed or rendered too dangerous for commercial traffic, every cargo destined for Asia from the Atlantic Basin or Mediterranean must reroute around the Cape of Good Hope, adding 10 to 14 days to voyage times. For a continent already counting the days until the next VLCC arrives, this is not an inconvenience, it is a supply emergency. The LR2 diesel arb from Houston to Singapore is already wide open; add two weeks of additional sailing time and the freight cost alone becomes prohibitive for all but the most urgently needed cargoes. The effective vessel supply for Asia-bound trade shrinks dramatically as the same number of ships take longer per round trip. Tanker rates, already at crisis levels, would enter territory with no historical precedent.

Consider the immediate consequences if a commercial vessel is struck by a Houthi missile or drone in Bab al-Mandab: insurance premiums spike overnight for the entire Red Sea corridor, shipowners pull vessels from the route within hours, and the Cape rerouting that already disrupted supply chains in 2024 returns, this time layered on top of a Hormuz closure. The compounding effect is what matters. Hormuz alone is a supply crisis. Hormuz plus Bab al-Mandab is a logistics crisis on top of a supply crisis. The market is not pricing this scenario.

5. Across the barrel: what our team saw this week

All prices are Friday March 28 settlement unless otherwise noted.

The real story this week, as it has been for the past month, is the growing divergence between paper volatility and physical tightness. Paper markets swing violently on headlines – crude dropped $17/bbl in minutes on Monday when Trump hinted at talks, only to bounce back above $100 within ten minutes. As our team noted on the podcast: “Physical product markets aren’t a meme like crude futures have now been turned into via Trump; either there will be supply or no supply and prices will reflect that.”

Brent settled the week at $112.57/bbl, WTI at $99.64. The Brent DFL reached $10.15, extraordinary levels reflecting the pain of being short in a structurally tight market. The prompt ICE Brent spread settled at $7.68, the steepest backwardation in recent memory. WTI/Brent paper remains extremely volatile, and that width is distorting everything downstream: WTI-linked crude is arriving in Asia at $10-20/bbl discounts to Brent-linked grades, but as our crude team has observed, Asia perhaps simply cannot optimise the world’s remaining supply according to normal physical arb levels. The quality challenge of replacing medium-sour AG crude with lighter Atlantic Basin alternatives is real and no amount of LP modelling overcomes it when the barrels are just not there.

Physical premiums in Europe finally came alive this week, with WAF, Black Sea, and North Sea diffs all rallying sharply. Brent-linked crude is being bid up by European and some Asian buying, while USG sour premiums are actually weakening, a sign that the US is getting long on sour crude from Venezuela, SPR releases, and Canada, even as refinery runs are up 900 kb/d year-on-year.

Dangote is reportedly running at full capacity in Nigeria, which is good timing as African nations scramble for alternatives to AG barrels.

In distillates, a massive spike in Singapore sales prices has blown the LR2 diesel arb from Houston to Singapore wide open, now commanding far better margins than into Rotterdam. This makes sense given the scale of Asian run cuts ahead. Australia remains the focal point, a huge, wealthy importer now seeing hundreds of fuel stations without at least one type of fuel. The government has lowered diesel flashpoint specifications for six months to allow more kerosene into the diesel pool, which helps defend the more politically sensitive diesel market but tightens the jet balance further.

Russian Baltic port loadings at Primorsk and Ust-Luga are at risk from Ukrainian drone attacks, this week Ust-Luga was struck twice and remains engulfed in flames, putting further pressure on Atlantic balances. Russia is also banning gasoline exports from April 1, removing yet another source of supply.

Gasoline saw the most dramatic moves of the week and the narrative shifted meaningfully. The EBOB crack settled Friday at $19.2/bbl, down from $22 earlier in the week. Gas E/W settled at +$6/bbl. Gas-nap collapsed to +$91.75 from +$115 at the start of the week. E10 blend margins deepened further to -$16/mt.

On the surface, this looks like gasoline weakness. But the real driver is a potential structural shift in the US gasoline market that could reshape global blending economics for months.

On March 25, the EPA issued an emergency fuel waiver allowing the production and distribution of a single national gasoline pool at a common Reid Vapor Pressure standard of 10 psi, effective from May 1. In practice, this dramatically increases the fungibility between RBOB and CBOB, and CBOB is currently trading almost 16 cents per gallon cheaper than RBOB. The blend composition of CBOB is fundamentally different: roughly 40% alkylate and nearly 45% naphtha, compared to the more reformate-heavy RBOB pool.

The implications ripple through every connected market. If the US shifts meaningfully toward CBOB specifications, naphtha consumption rises drastically in the world’s largest gasoline market, precisely at the moment when global naphtha supply is already at crisis levels. The US government appears to have judged that gasoline affordability at the pump is more economically sensitive than naphtha availability, but the knock-on effects may prove costly. Meanwhile, the US becomes more self-sufficient in finished gasoline and requires fewer imports of finished grade, instead focusing on importing alkylate and Eurograde components, as it has the naphtha domestically. Reformate demand in Europe would also decline.

For international trade, Europe is currently the cheapest source of gasoline supply into Asia, the Middle East, and Africa. But that export pull is likely weaker than the potential summer demand pull from a US market running on CBOB specs. This partly explains the correction in gasoline cracks and $E/W$ this week, the market is repricing around the possibility that US demand for finished European gasoline could be lower than feared, while simultaneously wrestling with the question of whether this spec change provides enough supply relief globally over the coming months.

There are also structural questions around the RBOB benchmark itself. Millions of forward contracts have already traded based on RBOB specifications. If the physical market migrates toward CBOB, what happens to the price of RBOB as a deliverable? It is technically very expensive to blend RBOB into CBOB, meaning that if physical demand shifts, the RBOB contract could become untethered from the physical market it is supposed to represent. This is creating real uncertainty among traders and making the gasoline complex extremely difficult to position in. Whether the spec change takes full effect, for how long it persists, and how it interacts with the broader supply deficit in Asia are all open questions that the market will be grappling with through Q2.

The fuel oil complex has come off from initial panic levels, Singapore 0.5% physical dropped to +$47/mt on Friday, high sulphur cash settled at +$28/mt, but the real concern lies in the forward curve. Singapore 0.5% June and July cracks settled at $15 and $16/bbl respectively, up from earlier in the week but still remarkably contained for what is, by any measure, the most significant supply disruption in decades. A conservative estimate puts the loss at 250 kb/d of low-sulphur molecules from Asian run cuts alone, roughly 1 to 1.2 million tonnes per month against a regional production base of just over 5 million tonnes per month excluding the AG.

Bunker fuel demand is structurally inelastic: ships still need to carry goods. The entire COVID lockdown barely dented global bunkering demand by 5-6%, and this time the demand for shipping is arguably even stronger as the world scrambles to reroute supply chains. Fresh attacks on Russian Baltic ports threaten even the fallback supply of high-sulphur streams. Forward cracks remain far too relaxed for a conflict that will drag on for months.

Naphtha was already at crisis levels before the gasoline spec change entered the picture, and the CBOB story only adds fuel to the fire. Korean premiums surged to $209/mt on Friday, up sharply from $150 at the start of the week and now at levels that are testing the limits of economic viability for Asian petrochemical operators. NWE premiums held at $30/mt. E/W and MOPJ spreads are back at historical highs.

This week brought reports of a strike on Qatar’s Pearl GTL facility, reportedly more than a year to repair, while Ust Luga, Russia’s main naphtha export outlet, remains offline after Ukrainian drone attacks. South Korea has imposed naphtha export controls effective Friday, as roughly half the country’s petrochemical feedstock relies on Hormuz imports. An LR2 fixture for naphtha from the USG to Japan was last reported at $9.6 million, double pre-conflict levels. Even with a truce, Asian naphtha balances would remain tight as West-to-East imports are still needed to replace missing barrels. If the US CBOB spec change drives materially higher naphtha consumption domestically, the pressure on global naphtha supply intensifies further, and the forward curve has not begun to price this.

In freight, TD25 surged to WS 763 on Friday, with USGC Aframax vessel supply at just 3 to 4 ships in the 14-day window against a 90-day average of 11, one of the tightest readings in recent months. WTI crude remains highly competitive into European destinations, and the cluster of USG-to-UKC fixtures at WS 700 and above confirms that charterers are paying significant premiums to secure cover. On the clean side, USGC MR rates face choppy near-term dynamics ahead of Easter, but the fundamental case, tight vessel supply, open arbs to South America through Q2, and sustained long-haul export pull, remains unchanged. WCI MR tonnage sits at half the average as the Sikka-Singapore diesel arb surges. The freight market is telling us what the forward curve in products is reluctant to acknowledge: physical flows are intensifying, not normalising.

6. The forward curve Is still too comfortable

A recurring theme across almost every product market this week is the gap between what prompt physical prices are telling us and what the forward curve is pricing three to six months out.

In gasoline, the forward crack curve prices a sharp normalisation through Q3 despite the structural reorientation of physical flows that is only just beginning and the deep uncertainty around CBOB implementation. In fuel oil, Singapore 0.5% cracks at $15-16/bbl for June-July have risen but still sit within a range that assumes the disruption is temporary. In freight, TD25 spot at WS 763 collapses steeply through the forward curve.

The argument embedded in the forward curve is clear: a Hormuz resolution allows AG barrels to return, unwinds the flow distortions, and relieves the East-of-Suez supply shortfall. But this argument requires several assumptions that grow less credible by the week.

The first is that a resolution is imminent. The negotiating positions are not converging – they are diverging. The US demands nuclear dismantlement; Iran demands Hormuz sovereignty. Neither side has shown willingness to move. And any real progress will come through GCC intermediaries, not through Trump’s public announcements.

The second is that even a ceasefire leads to a rapid restoration of flows. As we detailed in Part 2, the normalisation timeline from Hormuz reopening to steady-state refining is a minimum of two months. Infrastructure damage, Pearl GTL (1+ year repair), Ras Laffan LNG (potentially years), extends the disruption well beyond any ceasefire. Shipowners need weeks of evidence that peace is real before sending vessels back. Tank tops need clearing. Refineries face multi-week restart sequences. Asia needs crude resupply that takes 40+ days from Atlantic basin sources.

The third is that alternative supply routes remain viable. Ust Luga is on fire. Primorsk has been hit. Russia is banning gasoline exports from April 1. South Korea is imposing naphtha export controls. The “solvers” the market needs are each under pressure from separate but compounding forces.

And the fourth, perhaps most critically, is that the conflict does not escalate further. The deployment of US ground troops and the Houthi entry into the war both point in the opposite direction. Ground troops signal months of commitment. Bab al-Mandab closure would add 10-14 days to every Atlantic-Asia cargo. Neither scenario is priced into the forward curve.

As our fuel oil analyst put it this week: “I strongly believe we are way past the point where a quick satisfactory resolution is possible. This is the kind of conflict that will drag out for months. Complacency means we are not getting the right solvers in place when we need them, this will come back and bite us all.”

7. What to Watch Over Easter and Beyond

• The ground troops. Nearly 7,000 additional US troops, including 82nd Airborne paratroopers and two Marine Expeditionary Units, are now deploying to the Gulf. The Tripoli ARG arrived March 27. The Boxer ARG is expected mid-April. Trump’s April 6 deadline on energy infrastructure strikes coincides with this buildup. The question is whether the troops act, and if so, where and how. Any ground operation transforms this conflict from an air campaign into something far harder to reverse. The forward curve is not pricing this.

• The Houthi front and Bab al-Mandab. The Houthi Information Minister has publicly stated they are “considering” closing the Bab al-Mandab Strait. If Iran’s Hormuz playbook is replicated, or even partially replicated, the consequences for global shipping and Asian supply chains would compound an already severe crisis. A single vessel struck in the Red Sea triggers an immediate rerouting response, adding 10-14 days to Asia-bound voyages at precisely the moment Asia can least afford the delay.

• The Hormuz toll formalisation. Watch whether Iran’s selective transit system becomes further legislated in the coming weeks. Every day the toll regime operates, it becomes harder to reverse. The countries currently benefiting from access, China, Russia, India, have limited incentive to push for a return to freedom of navigation. The Western alliance’s leverage to demand unconditional access weakens with time.

• US commercial stocks and export risk. US crude and product inventories have been building as USGC refineries run flat out, with runs up 900 kb/d year-on-year. This creates a growing surplus of West-of-Suez oil that should increase the price incentive to move barrels eastbound. But at the same time, it increases the political temptation for a US export ban, the scenario that converts a regional crisis into a global one.

• The CBOB question. Whether the US gasoline spec change takes full effect, and for how long, will reshape global blending economics. The interaction between increased US naphtha demand, reduced finished gasoline imports, and the ongoing Asian supply deficit creates a web of consequences that the forward curve has barely begun to price. Watch implementation progress and any signals on duration.

• Asian run cuts. The full impact of refinery run reductions across Asia has not yet materialised in inventory. When it does, the product crunch, particularly in distillates and naphtha, intensifies further. The risk of unplanned outages is also growing as every remaining plant runs flat out.

Conclusion

The first two articles in this series tracked how the market repriced from logistics disruption to infrastructure war, and from infrastructure war to a structural supply crisis. This third instalment asks the question that the market has not yet fully confronted: what happens to the price of oil in a world where the Strait of Hormuz has an owner?

Iran’s demand for Hormuz sovereignty is not a negotiating position. It is a statement of intent that the GCC and the US will find unacceptable, making it a catalyst for further escalation rather than a pathway to peace. Meanwhile, US ground troops are deploying, the Houthis are threatening Bab al-Mandab, and physical product markets continue to tighten across every barrel.

Approximately 20 million barrels per day of crude and products transited the Strait of Hormuz before this conflict, roughly one-fifth of global petroleum consumption. The question of who controls that chokepoint, and on what terms, is the single most consequential question in energy markets today.

The forward curve says this resolves. The physical market says it doesn’t. We remain firmly in the camp of the physical market.