Impact Pathway of the Iran Situation: Inflation Rise → Liquidity Crisis → Supply Chain Restructuring?

The situation in Iran is bringing global market core variables back to "oil prices." CITIC Securities believes that, once Hormuz Strait transport is disrupted, the upward movement in crude oil will amplify global liquidity fluctuations via inflation expectations, monetary policy, and carry trade, further driving supply chain and industry structure reshuffling.

After attacks on targets within Iran, the market first priced in short-term supply interruptions. On Monday, oil spot prices opened up nearly 12%. As conflict repeatedly escalated, the market raised expectations of more severe transport disruptions, pushing oil prices higher and fluctuating. As of publication, Brent crude was quoted at $82.5.

Substantial signs of shipping tension have appeared. According to CCTV News, after the February 28 attacks, multiple major oil companies and trading giants announced suspension of oil and fuel shipments through the Hormuz Strait. Monitoring shows surrounding tanker speeds generally dropped to zero.

CITIC Securities believes the market has not fully priced in the Strait blockade risk; the true "shock depth" depends on the degree and persistence of disruption. Minor interruptions may drive inflation higher, but a major blockade could trigger tighter monetary policy and liquidity shifts.

Key Bottleneck: Hormuz Strait, not Iran's Export Share

Although Iran has an estimated 200 billion barrels of proven oil reserves (global third), and the world's second largest natural gas reserves, under sanctions and technical constraints, its oil exports in 2024 are only about 2.6% of global supply, and natural gas exports about 0.7%. What determines global pricing is not Iran's supply, but whether the Hormuz Strait remains open.

EIA data shows that in 2024, about 20.3 million barrels per day of oil and other liquid fuels pass through the Hormuz Strait, about 20% of global consumption and about 27% of global seaborne oil trade. About one-fifth of LNG trade also uses this route, with 84% of crude oil and condensate flowing to Asia.

Alternative routes are limited. The EIA estimates, even if Saudi Arabia and UAE pipeline routes operate at full capacity, they can only provide about 2.6 million barrels per day, only about 15% of the Strait's throughput. The blockade degree and duration will determine oil price shock upper limits and market pricing slope.

Four Scenarios: Oil Price Upside Is Nonlinear

Scenario 1: Only Iranian exports are continuously interrupted, supply decreases by about 1.5 million barrels/day, expect short-term oil price rise of about 10%.

Scenario 2: Strait transport falls by 25%, shortfall of about 5 million barrels/day, expect oil price rise of about 20%, similar to the 20% spike in September 2019 from production cuts.

Scenario 3: Strait transport falls by 50%, corresponding to about 10 million barrels/day supply reduction, expect oil prices to double in the short term.

Scenario 4: Full blockade, about 20 million barrels/day supply interruption, making price increases uncontrollable, conservatively oil prices may skyrocket by over 300%, but probability is considered low.

Buffer variables come from OPEC spare capacity and supply-demand gaps. CITIC Securities said OPEC's spare capacity is nearly 4 million barrels/day and, after Iran was attacked, OPEC stated it would increase oil output—this is the key evidence why the oil price curve still points to a "short shock."

First Layer of Transmission: Oil Prices Boost Inflation, Lag Is More Critical

According to estimates from a Federal Reserve System working paper (Harun, 2023), each 10% rise in oil prices has little direct effect on the current US core CPI, but will ferment in the following 4 to 8 quarters, ultimately cumulatively boosting it by about 0.1 to 0.3 percentage points. CITIC Securities uses a median value of 0.2 as benchmark elasticity.

Accordingly, scenario 1's 10% oil price rise corresponds to US core CPI rising by about 0.2 percentage points during the lag period. Scenario 2's 20% oil price rise would drive about 0.4 percentage points, enough for monetary policy to remain vigilant against renewed inflation.

In scenario 3, with oil prices doubling, US core CPI theoretically rises about 2.0 percentage points, and secondary inflation risks increase sharply. If entering scenario 4, oil price surge over 300% would theoretically lift CPI by about 6.0 percentage points, possibly unanchoring inflation expectations.

Second Layer of Transmission: Fed Rate Cut Expectations Reverse, Yen Carry Is the Flashpoint

Rising inflation will reshape the Fed's policy path. Based on the Taylor Rule (1999), the four scenarios imply policy rates of 4.4%, 4.7%, 7.1%, and 13.1%, meaning oil price rises may dampen or even reverse rate cut expectations.

Another risk point is Japan. CITIC Securities states about 72% of Japan's crude oil imports highly rely on the Hormuz Strait, and oil price fluctuations significantly drive its import prices. Historically, the import price index leads core CPI by about half a year; imported inflation may force the Bank of Japan to quickly raise rates.

If the rate hike pace moves forward, the narrowing US-Japan rate spread will trigger yen carry trade unwinding and repatriation, amplifying global liquidity volatility. CITIC Securities sees this as the key chain of "crude supply interruption → global carry trade reversal," potentially increasing risk asset volatility.

Third Layer of Transmission: Reconfiguring Freight Pricing, Metals, and Chemical Supply Chains

Rising energy prices will create clear differentiation in global supply chains, forming structural investment opportunities and risks.

Beneficiary #1: Oil Shipping. CITIC Securities believes restricting strait transport will raise freight rates, especially for VLCCs. Demand side: Asian buyers turn to the Atlantic basin, lengthening routes and using more shipping capacity; supply side: Persian Gulf dispatch limitations and higher insurance premiums.

Beneficiary #2: Electrolytic Aluminum. Shanghai Metals Market says infrastructure damage could cut nearly 600,000 tons/year of global primary aluminum supply; restoration difficulty further amplifies disruption. In the Middle East, Gulf countries’ primary aluminum production in 2024 reached 6.87 million tons, about 10% of global capacity. Any military action against Iran may have spillover effects on aluminum production and transport along the entire Persian Gulf coast.

Beneficiary #3: Chemicals. Iran is the world’s second-largest methanol producer, after China. WTO data shows its 2023 methanol exports accounted for about 20% of global trade, and about 55% of China’s methanol imports. Iran also is a major exporter of polyethylene and urea, with yearly urea production capacity of 8–9 million tons, about 12% of global trade.

Pressured direction: energy-intensive industries. Ceramics, glass, base metal products, and chemicals all have electricity costs above 5%, so these industries will feel pressure from rising energy prices. Meanwhile, Observer.com reports China’s energy self-sufficiency rate is about 85%, offsetting part of external shocks.

Market Pricing and Tail Risks: Extreme Probability Low, but Persistence Deserves Attention

From the term structure perspective, the market is mainly pricing in Iran’s oil being interrupted, not a full Hormuz shutdown. CITIC Securities points out that recent performances of stock, bonds, FX, and gold reflect concerns about persistent turmoil. The focus is shifting to whether oil prices will once again lift the global inflation center.

CITIC Securities tends to think sustained complete transport blockade is unlikely. China News Agency reports that oil revenue accounts for more than half of Iran's foreign exchange income; Iran’s officials say food self-sufficiency is about 60%, so it relies on imports. A prolonged blockade would intensify FX shortages and impact livelihoods, Iran’s capacity to endure is limited.

Another constraint comes from the US’s interests in oil price stability. CITIC Securities believes if inflation accelerates, the US tech cycle may face a phase-end and supply chain reconstruction will be hindered. For investors, the key variable is whether the global liquidity volatility window triggered by inflation will be extended.

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