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The Strait of Hormuz closure has set off a chain of events the likes of which only likely have COVID as a comparison.
Hormuz has been blocked coming up on four weeks. To be clear, the full disruption was not the 20,000,000 barrels a day that passed through Hormuz. Iranian oil has largely continued to be sold, and there has been rerouting of some of the Gulf barrels. The IEA has also helped to coordinate the phased release of ~400,000,000 barrels of oil. So the actual disruption is someplace closer to 10,000,000 BPD. That's the good news.
The bad news? 10mm BPD is roughly 10% of global (yes, GLOBAL) demand. For a highly inelastic commodity like oil, a 10% loss leads to orders of magnitude higher levels of prices. People, companies and industries enter a desperate bidding war where they become willing to pay unreasonable and unfathomable prices, or they face ruin, bankruptcy, and in some cases starvation.
Moreover, heavy crude, the Gulf kind of oil, is the primary oil type used for diesel. And heavy crude is not the only thing disrupted. LNG, fertilizer, industrial goods like petrochemicals, these all have stopped flowing. Asian economies are heavily dependent on these things.
So why hasn't the music stopped? For one, as mentioned, countries have been draining their strategic reserves. Moreover, shipments that escaped out of Hormuz are still arriving in many places. Some tanker journeys take 30 to 40 days. Half of the oil price spike has been driven by paper trading, where people have tried to lock in future shipments, or are speculating. This so-called paper trade is about to give way to the real physical trade, when those tankers stop showing up, and there is 4 weeks of empty ocean behind them.
So what is the impact of all this? Well, consider what along the supply and manufacturing chain depends on oil and diesel. If you said "nearly everything", you are right. So every step along the supply and manufacturing chain is about to reach costs we have not seen in our lifetimes. Consumer spending will go down while people redirect money to essential goods like food and energy costs. Wholesale spending will go down. Mass rationing, whether government or self imposed, will occur. And this is already GOING TO HAPPEN. We are not in "whether or not" territory, but in "for how long" territory.
In the next week or two, expect to see extreme spikes in energy prices, and correlated drops in most equities prices. Today's stock market crash was the beginning.
So how bad can it get? The best case scenario, the one I just described above, is modeled on Hormuz fully opening in the next 1-2 weeks, on logistics flows being fully restored in the next 1-2 weeks (meaning a restoration of insurance and crews willing to cross the Strait), and zero damage to pre-War infrastructure. Obviously, the likelihood of all that being the case is close to zero.
The "better" scenario is a partial restoration of Hormuz logistics, and only a correction and higher energy prices for the remainder of the year.
From there, it gets progressively worse. A sustained Hormuz disruption after April, and definitely after May, is bringing us not only into recession territory, but into "The worst Depression we have seen in our lifetimes" territory.
Personally, I am cash heavy (with some OXY April and June long call options), but I personally worry that the cash I have on hand will be used to get me and my family through what is coming.
Now, I fully expect folks to come on here, tell me I am being dramatic, and state that the war is nearly over and things aren't that bad. I would caution those folks to remember the lessons from Covid, where the US felt a certain sense of insulation....until it didn't. As I said, the "best case" scenario I described above is already a certainty, and already locked in.
Best of luck to folks, and I mean this from the bottom of my heart: I hope I am wrong. I hope oil execs and energy analysts making the same claims are wrong. I hope we have overestimated demand, underestimated supply, and haven't accounted for resiliency in the markets. In the meantime, I will be watching from the sidelines of the market, because from where I sit, this only gets worse.