WTI surges to near $73 as Strait of Hormuz closure prompts supply shocks

West Texas Intermediate (WTI), futures on NYMEX, trades 2.3% higher to near $73.00 during the early European trading session on Tuesday. The oil price strengthens as the closure of the Strait of Hormuz, a sea route from which 20% of global crude oil is shipped, has disrupted the global oil supply mechanism.

On late Monday, an Iranian Revolutionary Guard announced that the Strait of Hormuz had been closed and their military groups would fire on any ship ​trying to pass, Reuters reported.

Tehran has tightened its military activities near the Strait of Hormuz as part of its retaliation against the United States (US) for launching a series of aerial attacks and killing several of its top leaders, including Supreme Leader Ayatollah Ali Khamenei.

Meanwhile, US military forces have announced that they have destroyed command posts of Iran’s Revolutionary Guards (IRG) as well as Iranian air defense and missile launch sites, a move that has cripped Tehran’s attacking capability and could force the nation to call for a truce soon.

Going forward, fading dovish Federal Reserve (Fed) expectations for the June policy meeting could prompt concerns over the oil demand outlook in the near term.

According to the CME FedWatch tool, the probability of the Fed holding interest rates steady in the June policy meeting has increased to 53.5% from 42.7% seen on Friday.

Dovish Fed bets have squeezed after the release of the US ISM Manufacturing PMI report on Monday, which showed that its sub-component Prices Paid, a key measure of factory-level inflation, soared to 70.5 against estimates of 59.5 and the previous reading of 59.0.