The interim deal that paused the US-Iran war less than a month ago has effectively fallen apart. Since US strikes hit Iranian military targets around the Strait of Hormuz on July 15, both sides have traded attacks almost nightly, and the fighting escalated sharply over the weekend after two US soldiers were killed and a third went missing in an Iranian strike on a base in Jordan. The US hit back with another round of strikes on Iranian surveillance and air defence sites. Iran has now declared the Strait of Hormuz closed and the US has reinstated its naval blockade of Iranian ports.
The Strait matters well beyond the region because 20% of the world's oil and gas trade normally passes through it. With Iran and the US both treating it as a battleground rather than a shipping lane, tankers are being forced onto longer, costlier routes, raising the risk of a supply shock. The IMF has warned that the oil surplus which kept prices in check earlier in the war has largely been used up. That means there's not much room left if things get worse, whether that's direct strikes on oil and gas facilities themselves or a full closure of the Strait.
For Australia, this mostly shows up at the petrol pump and in the inflation numbers. Higher oil prices flow fairly directly into local fuel costs, and a sustained spike would make life harder for the RBA, which is already trying to keep inflation down without hurting an already weak economy. Australian super funds with global equity exposure also carry some indirect risk if this feeds into broader market volatility.
