Energy Markets on Edge: The Risk of Iran Closing the Strait of Hormuz
Investors and energy analysts are warning that the potential closure of the Strait of Hormuz by Iran could send oil prices soaring, despite the market’s current seeming calm. After recent military actions targeting Iran's nuclear facilities, oil prices have surprisingly held steady, partly because many believe Iran won’t risk targeting vital energy infrastructure that could trigger a strong U.S. military reaction.
The Strait of Hormuz: A Critical Global Oil Chokepoint
This narrow waterway between Iran and Oman serves as a lifeline for the global oil market, with approximately 20 million barrels of oil passing through daily. Any disruption here could have major ripple effects worldwide.
Market Response May Underestimate Threats
Some experts caution against complacency. Helima Croft, a leading commodity strategist, advises against believing the situation has stabilized too quickly. Barclays analysts emphasize that the market has yet to fully price in the possibility of Iran blocking this strategic passage.
Projected Oil Price Spikes From Major Banks
Goldman Sachs has modeled scenarios where if oil flow through the strait dropped by 50% for a month and then decreased by 10% for nearly a year, Brent crude prices could temporarily surge to $110 per barrel. Following this spike, prices might ease to an average of $95 per barrel in the final quarter of the year as increased output from the U.S. and OPEC helps stabilize supply.
Meanwhile, UBS paints an even bleaker picture. Analysts project Brent crude could cross the $120 per barrel mark should the strait close altogether. They highlight that such a disruption would surpass the severity of last year’s reduction in Russian oil exports after the Ukraine invasion.
Why Iran Might Hesitate — Yet Still Escalate
Both Goldman and UBS consider the probability of a total closure low, partly because the strait is critical for Iran’s own crude exports. However, experts note Iran doesn’t need full closure to significantly impact shipping routes.
Croft suggests Tehran could use asymmetric tactics to raise the costs and complexities for U.S. and Israeli operations without fully shutting down the strait. The Joint Maritime Information Center has already warned vessels to exercise caution when passing through, indicating increased risks.
Methods Iran Could Disrupt Shipping
Danske Bank’s chief analyst, Minna Kuusisto, explains that Iran could intermittently strike shipping traffic with drones or missiles. While the U.S. Navy might mitigate these threats fairly quickly, more severe actions such as mining the waters or sinking ships would cause much longer-lasting disruptions.
Mining the strait would effectively halt navigation as no insurance companies would cover vessels in mined waters. Although the U.S. might clear mines near the United Arab Emirates coast within about a week, broader clearance operations could take several weeks, greatly constraining shipping.
Potential Economic and Military Consequences
Extended disruption would force regional oil producers to max out storage capacity and eventually reduce output. While closing the strait is likely a last resort for Iran due to anticipated severe military retaliation, desperation could push the regime to take extreme steps.
Kuusisto warns that if Iran's Supreme Leader felt cornered with no options left, he might resort to a full blockade, dramatically escalating tensions and shaking global energy markets.
Conclusion: A Fragile Balance Holding
While the market currently downplays the risk of a Strait of Hormuz closure, the geopolitical landscape remains precarious. Oil traders and investors would do well to monitor developments closely, as even partial disruptions could drive prices sharply upward with wide-reaching economic consequences.
