Key insights
- Disruptions in the Strait of Hormuz leading to Force Majeure declarations by Middle Eastern oil suppliers could trigger defaults among mid-chain companies with fixed-price contracts and fuel global inflation. If the Strait remains closed, fertilizer distributors, food manufacturers, and commodity traders face financial distress. While some industries can pass costs to consumers, staples face price caps, squeezing manufacturer margins. This scenario poses a downside risk to US equities due to potential economic contagion and inflationary pressures.
Force majeure is essentially a “not my fault” notice oil companies send when they physically can’t deliver.
Middle Eastern suppliers are sending FM notices to clients in SK, JP, and India. Without FM, they’d owe clients the difference between contract price ($70) and spot ($120+) per barrel. With FM, the client pays the difference.
Of course some of the upstream companies will declare FM as well like a fertilizer company which says it can’t deliver due to the lack of oil, but these cases get progressively weaker as they aren’t as strong in the definition of “not possible” - because it is possible for the fert company to get oil, just more expensive.
If Hormuz stays closed past ~45 days from Feb 28 (2 weeks from now), termination clocks expire and mid-chain companies like fertilizer distributors, regional food manufacturers, and leveraged commodity traders get crushed. They’re locked into fixed-price contracts but paying spot for inputs, with no working capital to bridge the gap.
For industries that can pass costs down, the consumer eats spot prices. For staples, that’s politically impossible since governments cap prices. So manufacturers eat the margin instead.
TL;DR: Hormuz opens fast, or we see a wave of defaults in fixed-contract mid-chain industries and inflation everywhere else.