Iran’s Strait of Hormuz Shutdown Cuts 20% of Global Oil Flow—Here’s Why Markets Are Panicking

Oil markets just got a geopolitical shockwave. Iran's retaliatory blockade of the Strait of Hormuz—triggered by U.S. military strikes—has instantly severed 20% of global crude supply. No tankers, no LNG, no Band-Aid for energy portfolios.

The Choke Point Effect

Every supertanker's nightmare scenario is now reality. The 21-mile-wide strait handles a third of the world's seaborne oil. Shut it down, and you've got instant demand shock—with traders scrambling to price in war risk premiums overnight.

Petrodollar Whiplash

Brent crude futures are already mooning, but here's the kicker: this isn't just about oil prices. The real carnage hits currency markets, where petrostates suddenly can't recycle dollars into Treasuries. Cue another 'inflation is transitory' Fed press conference.

Cynical Finance Bonus

Meanwhile in Wall Street war rooms: 'Quick—reclassify oil futures as ESG investments since they're now conflict-related.'

Why the Strait of Hormuz matters so much

The Strait of Hormuz sits at the mouth of the Persian Gulf and has long been considered one of the world’s most critical oil routes. Tankers moved around 16.5 million barrels of crude and condensate per day through the passage in 2024.

That includes shipments from Saudi Arabia, Iraq, the UAE, Kuwait, and Iran. The strait is also the path for over 20% of global liquefied natural gas, most of which comes from Qatar.

Shipping operators and governments had already started reacting before Sunday. The UK government issued a rare warning to commercial vessels passing through the region, saying increased hostilities could disrupt shipping.

Frontline Ltd., one of the largest oil-tanker operators, confirmed it WOULD be more cautious offering tankers in the area. Iran has attacked merchant ships in the strait before, and the buildup of threats after the Israeli strikes raised clear alarm bells across the maritime and energy sectors.

There is no international law that lets Iran block Hormuz, so the MOVE is being enforced purely through military pressure. But Iran doesn’t have to send out its navy. Officials have several alternatives: fast patrol boats, drone attacks, and coastal missile strikes.

Those tactics are enough to make passage through the strait unsafe for commercial traffic. The US Fifth Fleet, along with European naval forces, has maintained a presence in the region, but the risk has already forced some shippers to delay or reroute their cargoes.

Global shipping slows as oil prices react

Disruptions aren’t limited to the Gulf though. Shipping through the Red Sea and Gulf of Aden has dropped roughly 70% in June compared to normal levels seen in 2022 and 2023.

A US-led force has been deployed in those waters to protect vessels, but rerouting traffic around Cape of Good Hope in South Africa has become the more viable option. That path adds both time and cost to shipments heading between Asia and Europe, which could push up inflation if the situation doesn’t ease.

But the move isn’t risk-free for Iran. Shutting the strait hurts its own export economy. Iran depends heavily on shipping oil out of the Gulf. It opened a facility at Jask, on the eastern edge of Hormuz, in 2021 to ease reliance on the main channel, but its capacity is limited.

The decision could also backfire diplomatically, especially with China, its top oil customer. China has used its UN Security Council veto in the past to defend Iran from Western sanctions, but that support could be tested if China’s energy needs are compromised.

Countries like Saudi Arabia and the UAE are more flexible. Riyadh can send oil via a 746-mile pipeline that links its oil fields to the Red Sea, avoiding both Hormuz and the conflict-heavy southern Red Sea.

The UAE moves around 1.5 million barrels a day through a pipeline that reaches Fujairah on the Gulf of Oman. But Iraq, Qatar, Kuwait, and Bahrain don’t have these alternatives. Their oil has to go through Hormuz, and most of it goes straight to Asian markets.

Analysts from SEB and Saxo Bank also predicted a $3–$5 per barrel increase in Brent crude, which closed Friday at $77.01. West Texas Intermediate ended at $73.84. Ole Hansen from Saxo Bank added that prices could open $4 to $5 higher if traders unwind long positions.

Since June 13, when Israel launched its first major strike on Iranian nuclear sites, Brent crude has risen 11% and WTI has climbed 10%. So far, oil’s upward movement has been capped by OPEC’s spare capacity and steady production levels. But if Iran keeps Hormuz closed and military tensions escalate, those buffers won’t last.

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