The ceasefire that didn't open the strait

Hopes raised by the Middle East ceasefire were gone by 13 April. The United States Navy did not escort commercial tankers through the Strait of Hormuz. It blockaded Iranian ports instead, and naval drones kept harassing the shipping lanes.

Escort or blockade

The choice matters because the two strategies aim at different things. An escort operation protects neutral shipping so that trade can resume, as the American navy did in 1987 and 1988 when it reflagged Kuwaiti tankers and shepherded them through the Gulf during the Iran-Iraq war. A blockade aims to stop an adversary's trade, in this case Iran's exports and imports, and in the traditional law of naval warfare it is a belligerent act. When the Kennedy administration surrounded Cuba in 1962 it called the operation a quarantine precisely to avoid that implication. Choosing a blockade signals that the confrontation continues, even if missiles have stopped flying.

A blockade is still a war zone

Swapping open fighting for a naval blockade does nothing to restart trade. Tanker owners run vessels worth many millions of dollars, crewed by civilian sailors, and they will not send them through waters where navies are on a combat footing, whatever the diplomats call the arrangement. The war-risk syndicates in London kept their cover cancelled, so commercial traffic through the strait stayed at roughly zero.

Crews have a say as well as insurers. Under the agreements that govern pay and conditions for many international seafarers, certain waters can be designated warlike operations areas, and crew members have the right to refuse to sail into them. A shipowner who can find neither insurance nor willing crew has no decision to make. The waters around a blockade, where warships may stop and search vessels and drones remain active, are exactly the kind of area those rules were written for.

Refiners scrape the tanks

Twenty million barrels a day of oil remains stuck behind the blockade, and the shortfall is now in its second month. Refineries around the world are drawing their tanks down towards minimum operating levels, and run cuts in Europe and East Asia look increasingly likely.

Minimum operating levels are a physical limit, not a preference. A refinery needs a certain volume of crude in its tanks and pipes simply to keep running, and inventories below that level cannot be used without shutting units down. Commercial stocks across the industrialised world were drawn first, then emergency reserves were released on top. By the second month of a shortfall this size, the remaining buffer is thin, and each week without tankers brings run cuts closer. Once a refinery cuts runs, fuel output falls, and the shortage moves from crude to petrol, diesel and jet fuel.

Who loses from the blockade

Iran is the intended loser, since its oil exports, loaded mainly at Kharg Island inside the Gulf, are cut off along with its imports. China, the main buyer of Iranian crude in recent years, loses a source of discounted oil. The other Gulf producers gain nothing from the ceasefire, because their tankers still cannot sail. The winners remain producers outside the region, from American shale drillers to Brazil and Norway, whose oil commands a high price, and refiners with access to non-Gulf crude. Importers in Asia and Europe continue to pay the most.

The options for importing governments are narrowing. Strategic stocks have already been released, so the next tools are measures to cut demand, such as lower speed limits, restrictions on non-essential driving and priority allocations of diesel to farming, freight and emergency services. The International Energy Agency's emergency framework includes demand restraint alongside stock releases, and it was written with a prolonged disruption in mind. Governments tend to resist such measures because they are visible and unpopular, but a shortfall of this size leaves them little alternative if the strait stays shut into the summer.

Shipping markets show the strain in a different way. With Gulf loadings halted, tankers are being redeployed to longer routes from the Atlantic Basin to Asia, which ties up more vessels for each barrel delivered. That keeps freight rates high even though the total volume of oil moving by sea has fallen, and it adds to the landed cost of every replacement cargo.

Markets misread the ceasefire

The sequence of the past week shows how markets price diplomacy. Futures fell sharply on news of the ceasefire because traders assumed that an end to missile strikes meant a return to shipping. The physical market never agreed, because a cessation of strikes changed nothing for insurers or crews. With the blockade in place, the gap between the headline and the reality has closed in favour of the physical market, and futures are likely to move back towards the price at which refiners are actually buying cargoes.

Escorting tankers would be a large undertaking. The operation in the late 1980s involved a substantial naval force over more than a year, and it protected a limited number of reflagged ships rather than the full flow of traffic. Shepherding enough tankers to move twenty million barrels a day, while also enforcing a blockade of Iranian ports, would stretch even the American navy, which is one reason the choice of blockade over escort matters so much for the oil market.

A blockade as a bridge

The strongest counterargument is that a blockade may be a step towards a settlement rather than away from one. By squeezing Iran's revenue while holding off from direct strikes, Washington may hope to force concessions quickly, after which escorts could follow and traffic resume. Navies can also move quickly once a political decision is made. That path is possible, but it requires Iran to stop harassing shipping and insurers to be persuaded that the strait is safe, and neither happens overnight.

The signals to watch are any shift from blockade to escort operations, the stance of the Joint War Committee in London, satellite tracking of tanker movements, refinery run rates in Europe and East Asia, and weekly inventory data in the United States and Europe. A halt to missile strikes has changed little for trade. As long as American warships blockade Iranian ports, insurers will stay away and the world will keep running short of oil, with European and Asian refiners probably the first to cut output.