All eyes on Hormuz as Iran strikes put energy markets in uncharted waters

The Ayatollah is dead, but the danger to Gulf energy supplies has intensified. While the US and Israel pummel Iran, Iranian drones and missiles hit not just Israel, but its Gulf neighbours. So far, energy facilities are not in the crosshairs — but how long can that last?

The famous Strait of Hormuz carries, in normal times, about 15 million barrels per day of crude oil, 5.5 million bpd of refined products, and 82.6 million tonnes annually of liquefied natural gas (LNG). This is about 20% of world oil supply, and 16% of LNG.

Rising shipping costs

Iranian forces have radioed ships a warning that the Strait is closed. With the inbound and outbound shipping lanes in Omani waters, vessels are not required to heed this instruction. Nevertheless, transit through the Strait has reduced sharply, down by about half, while shipping lines assess the risk and rearrange insurance.

Shipping costs had already risen sharply ahead of the fighting, with rates for a very large crude carrier reaching $200,000 per day, taking the cost of a Gulf-China voyage to almost $5 per barrel. Insurance rates, already elevated, are reportedly up 50% for voyages into the Gulf; no doubt they will rise further, and US- or Israel-linked ships could be uninsurable. The national oil companies, though, will try hard to keep their fleets sailing.

Reports of attacks on vessels have begun to emerge. Four ships had been targeted as of Sunday, one a member of Iran’s own “shadow fleet” and possibly a mistake or misdirection. GPS jamming affects navigation. Tehran’s strategy is not clear — possibly incoherent or at the whim of lower-level commanders because of the deaths of senior personnel. Or it may still be holding back some threats or seeking to shield its own critical oil and gas industry.

Modest rise in oil prices

If a closure is brief, the oil market will quickly recover. China will probably draw down its abundant strategic stocks, and the US could consider a release from the (albeit rather depleted) SPR. OPEC can increase output sharply once normal service resumes to refill inventories.

The market seemed to reflect that sentiment on Monday. Oil prices jumped 7% to their highest levels in months on Monday and Brent crude futures shot up to $82.37, the highest since January 2025, in the first futures trading after the Iran strikes. But by 0054 GMT, Brent futures were at $78.24 a barrel, up $5.37, or a modest 7.37%.

There is about 4 million bpd of spare capacity within the Gulf OPEC countries, mainly Saudi Arabia and the UAE, more than enough to replace Iran’s typical 1.5 million bpd. But that is, of course, not much use if exports through Hormuz are restricted.

The pipeline alternatives

Saudi Arabia’s East-West pipeline to the Red Sea and Abu Dhabi’s pipeline to Fujairah can carry from 6.5-8.5 million barrels per day of crude oil, avoiding the Strait, with some logistical limitations. That assumes that Iran does not target facilities further afield.

The Gulf has also become a key refining hub with major recent expansions in Iraq, Kuwait, Bahrain, the UAE and — albeit outside Hormuz — Oman. The Gulf provides about 10% of global gasoil and 20% of global jet respectively (this includes approximately 30% of Europe’s jet needs).

A complete closure of the Strait of Hormuz for longer than a couple of weeks is unlikely. The US Navy and allies would clear mines, sink the remaining Iranian warships, and eliminate missile launchers.

But drones could keep up a cheap campaign indefinitely and be almost impossible to stop. Houthi forces in Yemen have already demonstrated the ability to scare off most traffic from a major waterway, despite sinking or damaging very few vessels, and despite American and Israeli bombing. It could put Gulf shipping and airspace into a chronic situation of disruption, interruptions and expense.

Focus on Gulf energy infrastructure

Iran might also decide to attack its neighbours’ energy facilities more directly. Offshore platforms, onshore LNG plants, and refineries are particularly vulnerable to drone strikes. For now, Iran has avoided that but might change tack if its own energy production is damaged, or if the regime fears it is in serious danger of overthrow.

A lengthy stoppage would affect many other products. The Gulf region is a crucial exporter of liquefied natural gas, with about 16% of world supply, mostly from Qatar. Europe is emerging from a cold winter with very depleted gas stocks. This year is set to be a very strong one for LNG supply growth, with new projects in the US, Canada and elsewhere adding some 39 million tonnes per day of capacity.

Impact on European markets

But the near-total cutoff of Russian gas to Europe has left the market dangerously short of a cushion. Qatar was meant to be a big part of the supply growth this year and, especially, next. Again, a long disruption to shipping would strand this LNG in the Gulf. The disruption, anyway, may push back completion of the emirate’s three massive expansions of its North Field.

The Gulf countries, including Iran, are also major suppliers of liquefied petroleum gas (LPG), nitrogen-based fertilisers, petrochemicals, methanol, aluminium and helium. The GCC states are major importers of food, by both air and sea, with Iran, until now, an important supplier.

Closing or severely restricting Hormuz traffic would be catastrophic for Iran itself — it relies on the Strait for its own oil and industrial exports and many of its imports. It is thus an option only in extremis. But with its supreme leader and many of its top brass wiped out, that extremity may be near.

•  Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis