U.S.-Iran Conflict Escalates. Strait of Hormuz Shutdown, How Much Room for Oil Prices to Rise?

TradingKey - On the evening of February 28 local time, the Iranian Islamic Revolutionary Guard Corps announced that any vessel is prohibited from passing through the Strait of Hormuz and issued warnings to several passing ships. Affected by US-Israeli military actions and Iranian counterattacks, the security risks in the area surrounding the strait are extremely high, and navigation is currently unsafe.

Impacted by this ban, several major global oil companies and trading giants have officially announced the suspension of their oil and fuel transport vessels through the Strait of Hormuz, putting the global oil supply chain to a severe test.

The sharp rise in geopolitical risks has directly triggered severe volatility in the global crude oil market.

At the opening this Monday, WTI crude futures rose by more than 11%, and Brent crude opened with a gain of 13%, although the gains narrowed later.

Goldman Sachs analysts including Daan Struyven pointed out that the current real-time risk premium of $18 per barrel for crude oil is in the 98th percentile since 2005, and the call skew in the options market has set a 15-year high.

Why is the Strait of Hormuz so important?

The reason the Strait of Hormuz is known as the 'lifeline' of global maritime energy transport is that it is the core corridor for the export of Middle Eastern oil and gas resources, and its every move directly dictates the stability of the global energy market.

From a data perspective, its strategic status is clear at a glance. As the mandatory route for crude oil exports from eight Gulf countries, including Iran, Iraq, and Saudi Arabia, the combined average daily crude oil production of these countries in 2025 is approximately 25.61 million barrels, accounting for 24.5% of total global production.

The average daily crude oil export volume through the Strait of Hormuz is about 14 million barrels, accounting for 31%-34% of the total global seaborne crude oil exports, of which 75% of the crude oil eventually flows into the Asian market.

In terms of natural gas transport, natural gas exports from the Middle East account for 42% of total global trade, with liquefied natural gas (LNG) transported through the Strait of Hormuz accounting for 21% of global LNG trade. This waterway, which is only 40 kilometers wide at its narrowest point, carries about 20% of the world's total oil transport volume and is a true 'main artery' of energy.

Historically, Iran has repeatedly used asymmetric means such as speedboats, drones, and missiles to deter shipping, driving up regional shipping risks without triggering open conflict to demonstrate its ability to influence the global energy market, but it has never actually blockaded the strait.

In response, the Gulf Cooperation Council has called for Iran to immediately stop the relevant threats and safeguard supply chain security and global energy market stability. Iran previously announced a ban on any ships passing through the Strait of Hormuz; currently, tankers have stopped transiting, and the strait is effectively closed.

Should the Strait of Hormuz fall into disorder, the shock to the oil market will far exceed any period after the 1979 Iranian Revolution.

This suspension of navigation in the Strait of Hormuz shares similarities with the 1973 oil embargo, as both involve energy supply shocks triggered by Middle Eastern conflicts, thereby driving up oil prices, global inflation, and market risk aversion.

However, there is a fundamental difference in the nature of the two shocks. In 1973, Middle Eastern oil-producing countries took the initiative to launch an embargo and coordinated it with long-term production cuts, whereas this instance is a short-term logistical interruption caused by military deterrence. The scale of the impact of the two cannot be compared.

Bob McNally, a White House energy advisor during the George W. Bush administration and an analyst at Rapidan Energy, warned that market traders are currently seriously underestimating the threat of Iran's subsequent retaliatory actions to the global energy market, and a long-term closure of the Strait of Hormuz would inevitably trigger a global recession.

From the core logic of energy supply, global spare oil production capacity is highly concentrated in Gulf countries, but the export of this capacity relies heavily on the Strait of Hormuz.

Once the strait is closed, new production capacity will not be able to be delivered to global markets, effectively being 'locked' at the production site. At the same time, about 20% of global liquefied natural gas exports are also transported through the strait, most of which come from Qatar, and there are currently almost no alternative transport channels for this part of the natural gas supply.

McNally further analyzed that the closure of the strait will trigger a series of chain reactions. First, major energy-importing countries in Asia will experience panic hoarding, leading to the largest energy bidding war in history. Second, oil prices will be forced to rise to a level sufficient to suppress demand, and this rise will eventually lead to an economic recession, rebalancing the market by reducing energy consumption.

Market institutions generally believe that if the strait is closed for a long time, Brent crude oil prices may break through $100 per barrel in the short term, and in extreme cases even reach $130-$150 per barrel, while liquefied natural gas prices will also re-challenge the historical highs of 2022.

OPEC+ Emergency Meeting Signals Production Increase

Affected by the sudden military conflict, OPEC+'s production increase plan has undergone major adjustments. According to Bloomberg, the organization originally planned to approve an increase of 137,000 barrels per day for April on Sunday, consistent with the pace of production increases in the fourth quarter of last year. However, the situation changed abruptly after the conflict broke out, and a person familiar with the matter revealed that member countries are considering a production increase plan three to four times the original scale.

As a core member of OPEC+, Saudi Arabia has acted in advance and is currently accelerating crude oil exports to prepare for possible emergency supplies. This is not the first time Saudi Arabia has taken such measures; during the US strike on Iranian nuclear facilities last year, Saudi Arabia also temporarily increased crude oil supplies to stabilize the market.

However, OPEC+'s capacity to increase production faces substantial constraints. According to data from the International Energy Agency, Saudi Arabia has the world's largest spare capacity, with a maximum additional increase of about 1.8 million barrels per day. The UAE has an emergency production increase plan that can release at least 1 million barrels per day. But overall, the distribution of spare capacity is highly concentrated, leading the market to doubt the actual implementation of the production increase.

Helima Croft, head of commodity market strategy at RBC Capital Markets, warned: Regardless of the scale of the production increase OPEC+ announces, they may need to use inventories to fulfill their commitments because spare capacity is extremely limited and almost all of it is concentrated in Saudi Arabia.

The other factor is the bottleneck of logistics channels. If the Strait of Hormuz remains closed, OPEC+ will find it difficult to deliver capacity even if it exists. Data shows that in 2025, the combined oil exports of Saudi Arabia, Iraq, and the UAE through the Strait of Hormuz will reach as high as 13.1 million barrels per day. Once the passage is blocked, new production capacity will not be smoothly transported to the global market, rendering production increase plans moot.