Iran closes the Strait of Hormuz, how will the world's oil transportation lifeline being cut off affect the international market?

Caixin, March 3 (Editor Liu Jingyi)
On the night of March 2, local time, the Islamic Revolutionary Guard Corps of Iran announced that the Strait of Hormuz has been closed, and Iran will destroy all ships attempting to pass through the Strait of Hormuz.

As a critical maritime passage connecting the Persian Gulf and the Gulf of Oman, the closure of the Strait of Hormuz will undoubtedly have a significant impact on global energy markets, trade, and price stability.

What is the Strait of Hormuz?

The Strait of Hormuz is a narrow waterway connecting the Persian Gulf and the Gulf of Oman, about 48.2 kilometers wide at its narrowest point, located between the Musandam Peninsula of Oman and Iran. It is often called the world’s most vital oil choke point, with approximately 20% of global oil trade passing through it daily.

Within the strait are eight main islands, seven of which are controlled by Iran. Iran’s control of these islands gives it substantial influence over the waters of the strait.

Why is it crucial for oil trade?

The Strait of Hormuz is the main route for oil exports from Saudi Arabia, the UAE, Kuwait, Qatar, Iraq, and Iran.

According to the U.S. Energy Information Administration (EIA), about 20 million barrels of oil pass through the strait daily, with 70% destined for Asia. Since nearly 20% of global seaborne oil trade depends on this route, and alternative routes are extremely limited, any disruption in transportation would have a major impact on the global oil market.

Currently, only about 4.2 million barrels per day of pipeline capacity are available to reroute around the Strait of Hormuz.

Overview of oil exports through the Strait of Hormuz
A recent report by Goldman Sachs on Sunday indicated that by 2025, the average crude oil exports through the strait will reach 13.4 million barrels per day, with condensates at 200,000 barrels per day, refined products at 3.5 million barrels per day, and liquefied natural gas and other liquids at 1.4 million barrels per day. Saudi Arabia, Iraq, and the UAE are projected to export a total of 13.1 million barrels per day via the strait in 2025, with China being the main destination.

How will this affect the global oil market?

Citi predicts that due to the shutdown of the Strait of Hormuz, global oil prices are expected to continue rising over the next few days, with Brent crude likely remaining between $80 and $90 per barrel for at least a week. If tensions ease, prices could fall back to around $70 per barrel.

WoodMac also pointed out that if the oil tanker routes through the Strait of Hormuz cannot be quickly restored, oil prices could break above $100 per barrel.

In a report, analyst at WoodMac warned that this disruption would trigger a double supply shock: not only would exports through the strait be interrupted, but more importantly, OPEC+ production increases and most of the world’s spare capacity—key levers for balancing the global oil market—would be unavailable during the closure.

Previously, OPEC+ confirmed plans to increase output by 206,000 barrels per day starting in April.

On Monday, Bernstein raised its 2026 Brent crude price forecast from $65 to $80 per barrel, but warned that in an extreme scenario of prolonged conflict, prices could surge to $120–$150.

JPMorgan estimates that the Gulf oil-producing countries currently have enough storage and tanker capacity to cover about 25 days of supply disruption.

In recent years, European buyers have increased their share of Gulf crude exports to compensate for the Russian embargo, with about 900,000 barrels per day currently shipped to Europe.

Additionally, oil is not the only commodity passing through this route. The closure of this maritime corridor will also significantly impact global natural gas trade, as Qatar and the UAE’s liquefied natural gas exports will be forced to halt. These two countries account for 20% of global LNG exports, with no alternative routes to their destination markets.

Recent attacks have damaged several oil tankers, prompting many shipowners, major oil companies, and traders to suspend schedules for transporting crude oil, refined products, and LNG through the Strait of Hormuz.

As traders anticipate that deadlock in US-Iran nuclear talks could lead to supply disruptions, oil prices rose about 2% last Friday.

It is foreseeable that the closure of the Strait of Hormuz will disrupt global shipping routes, trigger supply risks, cause volatility in global financial markets, and exert inflationary pressures on many economies.