Oil Prices Surge 7% on Strait of Hormuz Fears

The Strait of Hormuz, a narrow waterway between Oman and Iran, handles about 20 million barrels of oil per day, equivalent to roughly 20% of global petroleum consumption. Additionally, about a fifth of the world's liquefied natural gas (LNG), primarily from Qatar, transits through the strait. While Iran has threatened closure, a formal blockade isn't required to stop traffic. Major shipping lines like Hapag Lloyd have already suspended transit. Insurers have increased war risk premiums, making voyages economically unviable for many operators and creating a "de facto" closure. Alternative routes are limited and cannot compensate for a full closure. Saudi Arabia operates an East-West pipeline to the Red Sea, and the UAE has a pipeline to Fujairah, but their combined available bypass capacity is estimated at only 2.6 to 4.2 million barrels per day. The U.S. Navy's Fifth Fleet is based in nearby Bahrain, and American carrier groups frequently patrol the area. Iran's Islamic Revolutionary Guard Corps (IRGC) controls naval operations in the Gulf and has a history of incidents, including the "Tanker War" during the 1980s Iran-Iraq War and more recent seizures of vessels. Asian economies are the most exposed to a disruption, receiving an estimated 84% of the crude oil that moves through the strait. China, India, Japan, and South Korea are the top destinations, accounting for a combined 69% of these flows in 2024. OPEC+ holds approximately 3.5 million barrels per day of spare production capacity, but this is concentrated in Saudi Arabia and the UAE. A significant portion of this spare capacity cannot reach global markets if the Strait of Hormuz remains inaccessible, limiting the group's ability to stabilize prices.