The Strait of Hormuz, for instance, is a strategic chokepoint in the global oil trade. Ioan Marin / Contributor / Getty Images Recently, tensions have escalated as Iran has threatened to cut off the passage of oil through this crucial waterway. Today, about 20 million barrels of oil and oil products transit the strait a day. This feature makes it an increasingly important lifeline for the world’s current and future energy supply. The geopolitical landscape, especially with the recent Israel-Hamas war, introduces new uncertainty over possible effects on oil prices and overall market volatility.
Most notably, Iran has threatened to close the Strait of Hormuz in recent weeks. This is reminiscent of similar calls heard in the past, particularly during periods of escalated geopolitical strife. In 2018, Iran threatened to close the strait. This was all in the wake of the US’s pullout from the nuclear accord and reimposition of sanctions on Tehran. Similar threats emerged from senior Iranian officials in 2011 and 2012, reflecting a longstanding history of conflict over this strategic region.
Using motions passed by the Iranian parliament, Iranian state media are claiming that closing the Strait of Hormuz is now a done deal. This has simmered under the surface and made for a much higher level of market jitters from investors and analysts alike. Military experts have warned that Iran could move to blockade the shipping route. Politically, that would be a physically difficult route for the country to block.
Andy Lipow, president of Lipow Associates, noted that the current developments in the Strait of Hormuz carry a different weight compared to past incidents. He stated, “This time feels different, given the barrage of missiles that have been fired for over a week and now the direct involvement of the USA.”
The impact of a closure would be devastating. If Iran is able to close the strait for a significant period, oil prices will likely race past $100 per barrel. This would be similar to the price increases we experienced in 2022 at the onset of the Ukraine crisis. Bob McNally, an energy analyst, emphasized this potential impact, warning that “a prolonged closure or destruction of key Gulf energy infrastructure could propel crude prices to above $100.”
Market analysts are closely monitoring the situation. Saul Kavonic highlighted the risks involved, stating, “There is real risk of the market experiencing unprecedented supply disruptions over coming weeks, of a much more severe nature than the oil price shock in 2022 in wake of the Ukraine war.” Even limited harassment of vessels transiting through the Strait could trigger thousands of dollars in oil price spikes.
As Rebecca Babin noted, even with tensions rising dangerously, Iranian energy infrastructure remains off-limits for direct attack. “It appears that both sides have an incentive to keep oil out of the line of fire, at least for now,” she observed. This cautious approach is understandable and will alleviate short-term shocks but it does not remove the threats posed by continued conflict.
The CBOE crude oil volatility index has spiked to heights not seen since March 2022 when Russia invaded Ukraine. This spike represents increasing worries in the market over the likelihood of disruptions in the Strait of Hormuz. Vandana Hari noted that traders would likely err on the side of caution amid these developments, adding, “So the picture is a little bit mixed, and I think traders will err on the side of caution, not panicking unless there is more real evidence to do.”
Military experts suggest that if Iran were to close the Strait of Hormuz, Western forces would likely intervene to reopen it. The scope and length of such a conflict would fundamentally reshape the geopolitical landscape in the region. Analysts speculate that if Iran were to utilize all its military resources against opposing forces, the ensuing conflict could last longer than previous Gulf Wars.