The Strait of Hormuz: A Potential Oil Market Disaster in the Making

The escalating tensions between Israel and Iran have sent shockwaves through the global oil market, particularly as the conflict threatens to disrupt the Strait of Hormuz, a critical chokepoint for the flow of oil. The Strait of Hormuz, located between the coasts of Iran and Oman, is one of the most important routes for oil transportation in the world, with about 20 million barrels of oil flowing through it each day.

As traders monitor potential supply disruptions, oil prices have risen in recent days. US oil futures climbed 4.28% to settle at roughly $74.84 per barrel, the highest closing price since January, while Brent crude, the global benchmark, rose 4.4% to $76.45 per barrel. While there have been no material disruptions to the global flow of oil so far, a disruption in the Strait of Hormuz could lead to an existential crisis for the global oil market.

A senior portfolio manager at energy investment firm Tortoise Capital, Rob Thummel, has warned that a potential disruption at the Strait of Hormuz would cause oil prices to surge toward $100 per barrel. The International Energy Agency (IEA) has also warned that a closure of the Strait, even for a limited period, would have a major impact on global oil and natural gas markets, as about one quarter of the world’s oil supply transits through the waterway.

Traders have previously fretted about the Strait of Hormuz during other Middle East conflicts, but prices resumed their gains on Monday evening and into Tuesday after President Donald Trump struck a more pessimistic tone than in recent days, saying people should “immediately evacuate” Tehran. Bob McNally, president at Rapidan Energy and former adviser to President George W. Bush, told CNN that he thinks the risk of disruption to the production and flow of oil is higher than what is being reflected in the market.

The Joint Maritime Information Center, an organization focused on global shipping, has also said it is closely monitoring the situation. The JMIC had said in a Monday notice that there has been a “minor decrease” in the number of cargo carrying vessels traveling through the Strait of Hormuz across the past week. While the JMIC noted that the Strait of Hormuz remains open and commercial traffic continues to flow, analysts at RBC Capital Markets have warned that an attack on oil processing facilities could lead to a serious supply outage in an extended war scenario.

Davide Accomazzo, a professor of finance at Pepperdine University’s Graziadio School of Business, told CNN that a potential disruption in the Strait of Hormuz remains a “big risk” for the price of oil. “We just don’t know exactly how this will play out,” he said.