Race To Reopen Hormuz Intensifies As Global Supply Chain Stress Remains At COVID Levels

The latest Bloomberg data show that shipping transits through the Strait of Hormuz remained largely disrupted Monday morning, even as Iran and Oman reportedly moved closer to a deal.

Brent crude futures traded near $85 a barrel as markets priced in the possibility that a deal to reopen the maritime chokepoint could be imminent. Yet global supply-chain stress remains near its highest level since the pandemic, and any normalization could take months, even if shipping traffic resumes.

UBS senior international economist Pierre Lafourcade highlighted the bank's proprietary Global Supply Chain Stress Index, which showed that although pressures eased modestly in July from their highest level since the pandemic, disruptions stemming from the Hormuz chokepoint continue to strain global shipping networks.

The median reading of the bank's 23-component Global Supply Chain Stress Index fell .4 standard deviation from June but remained .9 standard deviation above its pre-Iran conflict level. The average reading declined .3 standard deviation from June while remaining 1.35 standard deviations above February, or pre-US-Iran war, levels.

Lafourcade adds more color here: 

Marginal relief for supply chains relative to the June peak 

With the July data now complete, our Global Supply Chain Stress Index is showing a modest easing in pressure from the June reading, which marked the highest level of stress since the pandemic. Figure 1 below shows the latest reading.

The median of the 23 component series (blue line) now stands at 1.26 standard deviations, 0.9 sd units higher than prior to the Iran conflict but 0.4 units off the June reading. In average terms (red line), the indicator is up 1.35 sd units relative to February, but down 0.3 sd units relative to June, which appears to be the high watermark. Markets are optimistic about some form of imminent resolution, as reflected in the ~20$/b drop in Brent since the July 23 peak, but stress in supply chains is likely to linger on far beyond any implemented accord.

Divergence across components is increasing

The indicator is constructed as the cross-sectional average of z-scored series—a firstorder approximation to the data's first principal component. Figure 2 overleaf shows the contributions over the past five months. 

The indicator most directly capturing the supply shock nature of the Hormuz bottleneck is our measure of seaborne oil and gas flows (shown on the right of the figure, with the sign flipped to indicate rising stress). All other components reflect the shock more indirectly. Oil and gas shipping volumes in the Asia region—the polygon depicted in Figure 3—have retraced about half of the drop since the Strait closure (Figure 4). 

Meanwhile, the global volume of other cargo shipping remained roughly the same. Delivery times improved in Asia ex China but worsened in the US. The greatest relief is coming from lower air-freight costs in July, while shipping costs instead ratcheted up again across all major reporters (Baltic, Harper Petersen, Drewry, and Freightos).

The longer disruptions persist through the Hormuz chokepoint, the greater the knock-on effects across global supply chains, from higher energy and freight costs to depleted inventories, longer delivery times, and renewed inflationary pressure, are all ongoing concerns. 

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