Fear That Iran Will Close the Strait of Hormuz Grips the Worldwide Oil Industry

The ongoing conflict between Iran and Israel has increased global attention on the price of oil. Now, geopolitical tensions could escalate if Iran eventually decides to close the Strait of Hormuz, which is located between Oman and Iran.

OPEC is monitoring the area. The Strait of Hormuz serves as the entry point to the Persian Gulf, the area that 20% of the world’s oil production passes through en route to its destination. As a result, the Organization of the Petroleum Exporting Countries (OPEC) is closely monitoring the area to prevent the closure of the strait, which could lead to a potential disruption to the global oil supply. Meanwhile, concerns have arisen in the Gulf of Mexico due to the threat of Hurricane Milton, which could also affect oil and gas production in the region.

Both of these situations have heightened fears of oil supply disruptions, leading to a rise in Brent Crude prices to $80 per barrel.

What would happen if the strait closed? About 20 million barrels a day flow through the strait, so a prolonged closure could be catastrophic. The impact on the markets would be immediate, causing crude oil prices to rise due to a reduction in global supply. In fact, Bank of America analysts estimated in 2023 that the price of oil could exceed $250 a barrel. In addition to the uncertainty in the financial markets, producing countries would have to look for alternatives such as the Strategic Petroleum Reserve (SPR).

Who would close the Strait of Hormuz? Analysts point to Iran, although they also indicate that the unpredictability of the country’s decision-making makes it unclear what the outcome could be. Data firm Energy Aspects considers that it could be a signal to exert geopolitical pressure. However, these are all assumptions, and transit continues to flow as of today. Moreover, it’s important to note that the U.S. has its Fifth Fleet in the strait.

With Hurricane Milton’s arrival, what happens to the SPR? In response to the escalating conflict, the U.S. has ramped up its oil purchases, acquiring more than 6 million barrels. This is one of the purposes of the SPR, which aims to secure oil supplies during times of crisis. However, the situation has been complicated further by Hurricane Milton, one of the most powerful storms ever recorded in the Atlantic, posing an additional threat to the oil supply.

The current situation has caused the U.S. to depend even more on the SPR, which will contribute to a decrease in global supply. In this scenario, OPEC and Russia are responsible for stabilizing the market, adding to its volatility.

OPEC’s oil oversupply. According to experts consulted by Reuters, OPEC has enough spare capacity to partially cover a potential disruption in the Iranian oil supply, but not immediately. Saudi Arabia and the rest of OPEC members are said to have a spare production capacity of 6.4 million barrels per day.

However, according to a Citigroup analysis cited by CNN, if the closure of the Strait of Hormuz was temporary, markets would adjust, albeit with a temporary spike in prices. Additionally, they wouldn’t be able to compensate for the total loss of global crude oil.

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