Hormuz Blockade: Bilateral Deals Emerge as Spot Oil Flows Shrink

The physical flow of oil through the Strait of Hormuz has collapsed. More than 68 loaded tankers are trapped in the Persian Gulf, carrying around 16 billion litres of oil. This blockade halts the normal daily transit of around 20 million barrels of crude, effectively closing the world's most critical energy chokepoint.

Liquidity in the spot market has vanished. Traffic through the strait has plunged to near zero since early March, with at least 1,400 ships now anchored on both sides. This isn't just a logistical delay; it's a sudden, massive withdrawal of physical supply from global markets.

The market is pricing in this shortage. Despite a recent ceasefire, the price of Brent crude is trading near $100 a barrel. The CEO of Abu Dhabi's state oil company stated the strait is "not open" and that passage remains subject to political conditions, confirming the physical disruption is the primary driver of the price spike.

The Bilateral Pivot: New Trade Mechanics

The physical blockade has forced a new, permission-based trade system. Iran is consolidating control of a selective route through Larak Island, allowing only certain vessels to transit. On March 31, 36% of confirmed crossings were on US-sanctioned vessels. while another 27% were Greece-owned bulk carriers. This creates a tiered flow, with Iran's own tankers and a few approved foreign vessels forming a new, constrained supply channel.

The U.S. is enabling this new tier to prevent a total market freeze. Treasury Secretary Scott Bessent confirmed the administration is allowing Iranian oil tankers to transit the Strait to "supply the rest of the world." This waiver permits Iranian cargoes already at sea to move, creating a new category of 'approved' bilateral deals, like the first oil shipment to India in seven years.

This pivot has reshaped Russian flows. With the main route blocked, 67% of Russian crude is now moving on sanctioned tankers, while the 'dark fleet' handles the remainder. The selective blockade thus acts as a filter, funneling specific cargoes through a narrow, controlled passage while the broader market liquidity remains frozen.

Catalysts and Risks: The Path to Normalization

The primary catalyst for a return to normal flows is Iran's adherence to the ceasefire. CEO Sultan Al Jaber stated the strait remains "not open" under current conditions, emphasizing that passage is subject to "permission, conditions and political leverage" by Iran. This sets a clear test: if Iran begins allowing unrestricted transit, it would validate the bilateral system and signal a shift toward a fully open market.

A major risk is the prolonged price impact even after the strait reopens. The U.S. Energy Information Administration warned fuel prices could remain elevated for months due to the time needed to rebuild supply chains. The agency expects diesel prices to average over $4.80 a gallon for the year, with gasoline peaking near $4.30. This suggests the market's pain will outlast the physical blockade.

The U.S. Navy's planned escort program is a key variable. Treasury Secretary Scott Bessent noted the U.S. believes tanker traffic will increase naturally as Iran lets ships out, but the resumption of naval escorts is expected to restore confidence in open passage. This could pressure the existing bilateral deals, which rely on selective, permission-based flows, by offering a more secure and unrestricted alternative.