The U.S.-dominated global oil trade system is under pressure from the Iran War and the closing of the Strait of Hormuz. Governments in major consumers nations are turning to opaque deals with Gulf producers and Tehran to secure their?supplies. Since the start of the conflict on February 28, a fifth of oil supply from the Gulf has been disrupted. This has caused a serious blow to the economies of many countries, especially those in Asia that depend on Middle East imports for 60% of their needs. The 13-week long blockade of Hormuz has led to a growing number of signs that major Asian importers have adapted to the new realities by striking direct agreements with Gulf producers to allow vital flow of crude, chemicals, and fertilizer across the Strait. This is often done with Tehran's approval. 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 switched off in order 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 deals are largely opaque in terms of their structure. It is likely that most of these deals are settled outside of the traditional oil trade system, using currencies other than U.S. dollars or informal barter arrangements.

The pattern is the same regardless of whether or not these trades include explicit fees for transit to Tehran, something Tokyo has "denied". It reinforces Iran's control de facto over the traffic along this critical 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.

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 direct deals with regional producers in order to secure supplies. It may also create pricing mechanisms which protect buyers from volatile prices and ensure transit through Hormuz.

Already, signs of this shift are beginning to emerge. The Indian Prime Minister Narendra Modi was in the United Arab Emirates last Friday to discuss long term supply agreements and expanding strategic storage. The timing of the trip, in the middle a war in the region, underscores the urgency of 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 prevent such fragmentation. The introduction 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 was a result of its "petrodollar". It gave Washington unprecedented leverage, and it allowed Washington to impose sanctions which effectively excluded countries, companies, and individuals from international trade. In recent decades, the U.S. has significantly increased its 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 trading network, bypassing the dollar and Western shipping.

Risk of being subject to U.S. sanction prompted many emerging economies, including major ones, to look at alternative trading mechanisms. These efforts have so far had limited success. Only 10% to 20% percent of the global oil trade occurs in currencies other than dollars.

The shock of the Iran War - and the partial shut down of one of the most important energy routes in the world - has caused buyers to rethink energy security strategies. This could accelerate this shift. Asia accounts for more than half of all global imports and over a third of the world's 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 remain dominant in 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)