[US-Iran Truce] The War Is Over, but Global Inflation Still Shakes the Economy

"Supply Shortages in Crude Oil Will Be Reflected in Spot Prices"
Inventories of Sulfur, Helium, and More Also Decline...Widespread Inflationary Pressure
60% of AI Operating Costs Are Energy

Associated Press Yonhap News

International oil prices are stabilizing following an agreement between the United States and Iran to sign a memorandum of understanding (MOU) for an end to hostilities. However, economic experts believe that the cost the war has imposed on the global economy will not disappear easily. They predict that the impact of the strait—which, due to the war, was controlled for over 100 days and through which about 20% of the world's seaborne crude oil passes—will continue to exert inflationary pressure.

Reopening of the Strait of Hormuz... Normalization Is Expected to Take Time

Associated Press Yonhap News

The core of the agreement is essentially the reopening of the Strait of Hormuz, which had been virtually paralyzed. The closure of the strait caused international oil prices, maritime insurance premiums, and shipping costs to surge, imposing a significant economic burden on the global economy.

With the end of hostilities and the reopening of the strait, international oil prices are declining amid expectations for peace. On the New York Mercantile Exchange, July delivery West Texas Intermediate (WTI) crude fell 4.50% from the previous session to $81.06 per barrel. August delivery Brent crude on the ICE Futures Exchange is trading at $83.87 per barrel, down 3.95% from the previous session.

However, the market does not expect supply chains to normalize immediately. The Wall Street Journal (WSJ) reported that even after the strait is reopened, it will take considerable time to remove sea mines, restore ports, and reposition vessels.

The strategic oil reserves utilized during the war are expected to create new demand for crude oil. According to WSJ, global oil inventories have decreased by 250 million barrels since the outbreak of war. Major countries, including the United States, released significant amounts of strategic reserves to address supply shortages, but WSJ notes that this is essentially a case of using up future supply capacity for present needs.

U.S. crude oil and related product inventories have recently fallen to their lowest levels since 2004. As of April, global oil inventories had dropped to 79 million barrels, a historically low level. It could take several months to years to restore production facilities and rebuild inventories. As countries still need to replenish inventories after hostilities end, it is unlikely that international oil prices will quickly return to pre-war levels.

According to the Financial Times (FT), Mike Wirth, CEO of Chevron, warned, "Market buffers and shock absorbers are continuously being depleted," adding, "In June and July, supply shortage pressures will be more directly reflected in spot prices."

From Oil Prices to Food... Global Inflationary Pressures

AP Yonhap News

The countries in Asia were those hit hardest economically by this war, and despite the peace agreement, inflationary pressures are expected to persist for some time.

The share of energy crossing the Strait of Hormuz amounts to 80% for Taiwan, 73% for Japan, 72% for Korea, and 43% for China. For liquefied natural gas (LNG), the figures are 40% for Taiwan, 35% for Korea, 20% for Japan, and 15% for China.

The increase in energy costs has driven up manufacturing costs, which in turn has led to higher consumer goods prices. These effects then spread to Europe and the United States through global supply chains. This is a different pattern from the 2022 Russia-Ukraine war, where the European economy was hit the hardest. Philip Lane, Chief Economist at the European Central Bank (ECB), recently stated in a speech that "global shocks cause cost increases worldwide."

The war has negatively affected not only energy but also the supply of various raw materials. The Financial Times (FT) has pointed out that a significant portion of the world's sulfur trade passes through the Strait of Hormuz. Sulfur is a key ingredient in fertilizer production. Supply disruptions caused by the war have driven up fertilizer prices, and some companies have reduced production. FT observed that disruptions in sulfur supply could become a trigger for higher food prices in the future.

The Organisation for Economic Co-operation and Development (OECD) has warned that if disruptions to energy production and maritime transport in the Middle East persist, global economic growth could fall to the low 2% range this year.

The artificial intelligence (AI) industry, which requires enormous amounts of electricity, is also seeing growing expectations for cost reductions due to the agreement. According to the OECD, about 60% of data center operating costs are energy-related. Operating the large-scale servers needed for AI training and inference requires massive amounts of power. Given that AI investments heavily rely on large-scale borrowing, rising energy prices put simultaneous pressure on both operating and financing costs.

With about one-third of the world's helium supply coming from the Gulf region, a positive impact is also expected for the semiconductor supply chain. The OECD has noted that if normalization of energy supplies in the Middle East is delayed, it could become a burden for investments in semiconductors and data centers as well.

This content was produced with the assistance of AI translation services.