The U.S.-dominated global oil trade system is under pressure from the Iran War and the closing of the Strait of Hormuz as governments in major consumer nations make increasingly opaque deals to secure supplies with Gulf and Tehran producers. Since the start of the conflict on February 28, a fifth or more of global oil supply from the Gulf has been disrupted. This has caused a serious blow to the economies of Asia which depend heavily on Middle East imports for 60% of their needs. The 'Hormuz blockade' is now in its thirteenth week. There are signs that the major Asian importers, with Tehran's approval, are adapting to the new reality and striking direct agreements with Gulf producers. Following direct contact between the leaders of Iran and the countries that purchased oil, several tankers have recently crossed Hormuz. They often sail with their tracking devices turned off to avoid detection. A Panama-flagged oil tanker with 2 million barrels each of Kuwaiti and Emirati Crude passed through the Strait last week on its way to Japan after discussions between Iranian President Masoud Peshkian and Prime Minister Sanae Takaichi. Iran has also made arrangements with China and Pakistan for the movement of oil and LNG out of Gulf. These bilateral and trilateral agreements are largely opaque. It is likely that these deals are settled in currencies other than U.S. dollars or by informal barter arrangements.

The pattern is the same whether or not these trades include explicit fees for transit to Tehran, which Tokyo denies. It reinforces Iran's "de facto" control over the traffic along the crucial waterway.

Iran wants to include this influence into any future agreement with Washington. President Donald Trump has rejected that demand.

The current standoff will likely have a lasting impact on the oil trade patterns, regardless of how it is resolved.

PERMANENT RISK Crossing the Hormuz will likely carry a geopolitical premium that is persistent. This will result in Middle East crude being priced higher, forcing importers of oil to rethink their supply security.

This could lead to more government-backed deals being made with regional producers in order to secure supplies, establish pricing mechanisms that protect buyers from volatility, and help secure transit through Hormuz.

Already, signs of this shift are beginning to emerge. On Friday, Indian Prime Minister Narendra Modi traveled to the United Arab Emirates to discuss long-term agreements for supply and strategic storage. The timing - in the middle of a war - highlights the urgency of the situation for New Delhi and could signal a wider turn towards bilateral energy diplomacy throughout Asia. In the current situation, it is reasonable to expect China to expand its bilateral relations with Gulf States, including the post-war Iranian regime, as well as with other oil-and-gas exporters in the world.

PETRODOLLAR IS UNDER THREAT The changing patterns of trade are contributing to the gradual erosion of the dollar’s dominance over the global oil trade. Modi's Abu Dhabi talks followed an agreement signed between India and UAE in 2023 to settle bilateral trade using rupees and dirhams instead of dollars. This is part of a larger push by emerging economies for diversification in their payment systems.

The oil trading structure of today was created in the 1980s and 1970s to avoid fragmentation. The creation of crude futures in New York, London and other major cities brought transparency and liquidity into a system dominated by prices set by producers.

It also cemented the U.S. Dollar as the core currency of the system.

Washington's dominance over the global financial system, thanks to the "petrodollar", gave it unprecedented leverage. It was able to impose sanctions which effectively excluded countries, companies, and individuals from international trading. In recent decades, Washington has dramatically increased the use of sanctions to target countries like Iran, Venezuela and Russia in pursuit of geopolitical as well as economic goals. These measures led to the creation of a vast oil?network which bypassed Western?shipping and the dollar.

Risk of being subject to U.S. sanction prompted many emerging economies, including major ones, to look at alternative trading mechanisms. These efforts have only had limited success so far: today, it is estimated that 10% to 20% global oil trade takes place in currencies other than dollars.

The shock of the Iran War and the 'partial shut down of one of the most important energy arteries in the world, which forced buyers to rethink energy security strategies, may accelerate this shift. Asia accounts for more than half the world's imports and a third of the global oil consumption. Any move towards bilateral, state-driven trade relationships in this area would lead to a more fragmented energy trading system. The Middle East disruption of supply has certainly consolidated the U.S.'s position as the world’s leading oil and gas producer. Washington will likely continue to dominate the global economy for many decades to come. The dollar is not expected to be replaced by any other currency.

The?fallout of the Iran war may still lead to a fragmentation in oil prices, which would reduce transparency and Washington's control over the financial infrastructure that has supported the global oil market for decades.

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(source: Reuters)