Hormuz Watch: Week 11

The Setup

This is Week 11 of Hormuz Watch, a weekly series tracking five indicators that will tell you whether the equity market or the commodity market has to adjust. The original thesis and the five-number framework were laid out in The Hormuz Crisis Nobody Is Watching. Last week's update: Week 10.

The Dashboard

1. Tanker Transits

Threshold: recovery above 30 to 40 per day. Week 10: 7 crossings. Week 11: 11 crossings (May 13), four inbound, seven outbound per Windward. Four of the eleven (36%) crossed dark. Iran's state broadcaster claimed roughly 30 vessels transited since Wednesday evening, though independent verification is pending. The headline transits: a Chinese VLCC (Yuan Hua Hu) carrying 2 million barrels of Iraqi crude exited safely, broadcasting "CHINESE VESSEL AND CREW" on AIS. Qatar's Al Kharaitiyat completed the first LNG transit since the February closure on May 9. But an ADNOC VLCC was struck by two Iranian drones, and the US has now redirected 70 vessels and disabled 4 to enforce its blockade on Iranian ports. Still 92% below pre-war levels. Verdict: slight improvement (7 to 11), with notable firsts, but not free navigation. This is selective transit under Iranian control.

2. Brent Crude

Threshold: sustained moves above $120. Week 10: ~$100 (deal-hope dip). Week 11: ~$107. The $16 deal-hope discount from last week has partially reversed. The IEA warned this week that crude and fuel flows through Hormuz dropped by nearly 6 million barrels per day in Q1, and that the global oil market is likely to remain "significantly undersupplied until October" even if the conflict ends next month. Saudi Arabia informed OPEC its oil production dropped to the lowest level since 1990. Trump called the ceasefire on "massive life support." Verdict: worse. Bouncing back from the deal-hope low with the IEA confirming the supply deficit is structural, not transient.

3. Brent-WTI Spread

Threshold: widening beyond $15. Week 10: ~$5 to $10. Week 11: ~$3 to $5 (Brent ~$107, WTI ~$102 to $105). Still compressed and well below the $15 warning level. The Trump-Xi meeting may be supporting the compressed spread: Xi expressed interest in increasing purchases of US crude, which would bid up WTI specifically. Verdict: stable. Not yet signaling acute global dislocation, though the IEA supply warning complicates the benign reading.

4. Urea (Fertilizer)

Threshold: $750 to $800 per ton signals unavoidable food price impact. Week 10: wholesale $577 to $628. Week 11: CBOT May futures at $623, benchmark CFD at $562. Broadly stable. The planting-season lock-in has not changed: 70% of US farmers could not afford full fertilizer application this spring. That yield reduction is permanent for 2026 and will show up as food inflation through early 2027. Verdict: locked in. Wholesale holding steady. The damage clock is ticking toward September harvests.

5. The Fed

Threshold: signals it cannot cut or considers hiking. Kevin Warsh was confirmed as Fed chair on Wednesday in a 54 to 45 vote, the closest in modern history. Only one Democrat (Fetterman) crossed party lines. Powell's term as chair ends today. He is staying on as governor, preserving his vote on the rate-setting committee. Warsh replaces Miran on the Board, meaning Miran's consistent dissent in favor of cuts is gone. Warsh has called for "regime change" at the Fed and said rates can be lower, but markets are pricing elevated odds for a rate hike, not a cut. His first FOMC meeting is June 16 to 17. Verdict: transition complete. The new era starts now. June 17 is the first real signal of Warsh's direction.

The Tollbooth

Last week we outlined three scenarios: the deal works, the deal collapses, or the middle path where Iran controls partial reopening through its new Strait Authority. That middle path is now the operating reality.

Iran's Persian Gulf Strait Authority (PGSA) is formally operational. Lloyd's List obtained the "Vessel Information Declaration" form that all ships must submit before transiting: detailed ownership, insurance, crew, and cargo information, followed by payment. Some ships have paid up to $2 million, with payments accepted in Chinese yuan. Official tariff schedules have not been published.

China negotiated a bilateral deal. Following requests from China's foreign minister and ambassador to Iran, Tehran agreed to facilitate passage for Chinese-flagged vessels under the two countries' strategic partnership. The Yuan Hua Hu, a COSCO-owned VLCC chartered by Sinopec's trading arm Unipec, transited Wednesday with 2 million barrels of Iraqi crude after being stranded for over two months. A second Chinese vessel, the vehicle carrier Xiang Jiang Kou, also passed through.

For everyone else, there is a problem. The IRGC is sanctioned by the US, the UK, and the EU. Paying a toll to the Strait Authority, which operates under IRGC control, could constitute funding of terrorism under international law. As maritime governance expert Ian Ralby told NPR: paying the toll may get one ship out, but it could get that vessel and every companion ship in the fleet sanctioned. Western shipowners are stuck between an impassable strait and a sanctions minefield.

Meanwhile, the diplomatic picture did not improve. Trump, meeting Xi in Beijing on Thursday, agreed that the strait "must remain open." Xi opposed the tolls. But China's official readout of the meeting did not mention Iran or the strait at all. Secretary Rubio urged China to use its influence on Iran, but Beijing is simultaneously cutting its own bilateral transit deal, getting its ships through while the rest of the world waits. Trump called the ceasefire on "massive life support" and Washington and Tehran remain far apart: the US wants Iran to hand over enriched uranium, Iran wants sanctions lifted and its sovereignty over the strait recognized.

This is the scenario the equity market has not priced. Not crisis. Not resolution. A prolonged state of Iranian control over one-fifth of global oil transit, where Chinese ships pay tolls in yuan and Western ships reroute around Africa. Oil at $85 to $110 indefinitely. Insurance premiums that never normalize. Global fleet capacity permanently reduced by Cape of Good Hope diversions. The IEA confirmed this week that the market will remain undersupplied through October even in the optimistic scenario. Saudi production at the lowest level since 1990 means there is no spare capacity waiting on the sidelines.

What Could Go Wrong

Deal still materializes. Iran and the US reach terms. The Strait Authority is dissolved or depowered. Transit normalizes over 30 to 60 days. Oil drops to $75 to $85. Possible, but each week that the PGSA operates and collects revenue makes it harder to dismantle.

The toll system fractures sanctions. If enough non-Chinese shipowners decide to pay the PGSA to move stranded cargo, it creates a de facto normalization of Iranian control and undermines the sanctions regime. Western governments would face a choice: enforce sanctions on their own shipping companies or quietly allow the tollbooth.

The middle path hardens (most probable). China gets its ships through. Qatar and the UAE negotiate limited arrangements. Western carriers stay locked out or pay at their own legal risk. Oil stabilizes around $95 to $110. The Fed stays paralyzed between inflation that Warsh wants to fight and growth risk that his committee cannot ignore. This is not a crisis with a clean end date. It is a new normal.

The Bottom Line

Week 11 scorecard: transits ticked up (7 to 11) but under Iranian control, not free navigation. Brent bounced back to $107 as the deal-hope discount evaporated. The spread held steady. Fertilizer damage remains locked in. And Warsh is now Fed chair, with his first meeting June 17. The middle path we predicted last week is no longer a prediction. Iran built a tollbooth on the world's most important waterway, and China is paying. Watch the dashboard, not the headlines. Data over narrative. Always.