Oil Stays Elevated as Strait Disruption Keeps Inflation Risks Alive

The markets are generally happy today, but US-produced oil does not seem to fit.

This reaction can largely be explained by Trump’s announcement yesterday that he is willing to end the war without reopening the Strait of Hormuz.

But the implications of oil higher-for-longer are unsettling. If the Strait remains closed, we will have higher prices for oil, fertilizer, helium, aluminum, and other commodities.

That’s not at all good for inflation or long-term bond prices.

Technical Explanations

The S&P 500 was down five straight weeks. The VIX, a measure of fear and volatility, was a very elevated 30.61 yesterday (yellow highlight).

The markets were interested in any bit of good news they could find, and Trump provided that news.

Diesel $0.36 from Record

This morning, I noted Gasoline Prices Top $4 First Time Since Aug 2022, Diesel $0.36 from Record

• The national average price of gasoline topped $4.00 today for the first time since August 2022.
• Gasoline prices are $1.04 from a month ago, up 34.7 percent.
• The price of diesel is up $1.70 from a month ago, 44.4 percent. Diesel is only 36 cents from a new record high.

As bad as things are for consumers, they are miserable for farmers and truckers.

Farmers and truckers are both big diesel users. Rising diesel and fertilizer prices are going to have an impact on prices at the grocery store.

Markets Rattled by the Blockage

The Wall Street Journal comments on The Other Markets Being Rattled by the Blockage of Hormuz

• Fertilizer: The fighting has stranded big chunks of the world’s supply of ammonia, urea, sulfur, and phosphates.
• LNG: It has also choked off roughly 20% of the supply of liquefied natural gas, or LNG, which fertilizer makers in Europe and elsewhere need to generate the tremendous amounts of electricity necessary to convert atmospheric nitrogen into plant food.
• Aluminum: As with urea, Qatar has shut down its aluminum production.
• Helium: Helium is an essential coolant in MRI machines and semiconductor manufacturing. The U.S. produces the most helium, yet Qatar accounts for about 35% of world capacity. If its output remains offline for another four to eight weeks, supplies will be stretched and could cause problems for chip makers, said François Jackow, chief executive of industrial gas supplier Air Liquide.
• Plastics: Investors expect domestic producers to be able to raise prices in step with import-reliant rivals that face more expensive byproducts of oil-and-gas production and processing. Naphtha, ethane and propane are the building blocks of plastics.
• Cotton: Higher plastics prices have driven traders into cotton futures. The more pricey polyester and other synthetics are, the more clothing and textile makers shift to cotton, prices of which have been depressed. Cotton futures are up just 4.6% this month, but they hit 70 cents a pound Friday, the highest price since December 2024.

Charlie Bilello on Fertilizer

About a third of the global fertilizer supply passes through the Strait of Hormuz.

It takes 30 days for a vessel of urea to load in the Persian Gulf, sail to the US, and reach the interior. A vessel loading today might not arrive until May 1. The spring application window does not wait for a ceasefire.

Every week of continued disruption pushes more acreage from nitrogen-intensive corn toward soybeans. Once planted, that decision is irreversible for the growing season. The corn-urea ratio is at 87 to 90 bushels per ton, a five-year high per CME Group data. Farmers cannot afford to plant corn at these nitrogen prices.

This is not a commodity cycle. This is a structural acreage reallocation being driven by a naval blockade eight thousand miles from Iowa, and it will show up on every American’s grocery receipt by autumn.

40% of Global Helium Is Offline

The Health Impact of Helium

Add It All Up

If you add this all up, the two words that best describe the setup are “more inflation.”

Powell’s speech was to Harvard students but read between the lines.

A quick check of CME Fedwatch suggests shows the market now expects the Fed to hold interest rates steady all the way through March.

But if the strait remains closed for long, the next move is far more likely to be a series of hikes.

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