Iran Conflict Disrupts Key Oil Route, Sending Energy Prices Soaring

Growing tensions with Iran have severely reduced shipping through the Strait of Hormuz, a critical waterway that handles about 20% of the world's oil supply. The disruption has caused oil prices to spike, with experts warning that a prolonged closure could push crude prices into triple digits.

Energy markets experienced significant volatility Monday as escalating conflict involving Iran led to major disruptions in shipping through the Strait of Hormuz, underscoring the critical importance of this waterway to global oil distribution.

This narrow channel serves as the gateway from the Persian Gulf, facilitating the transport of approximately 20% of worldwide oil supplies. Vessels navigating these waters, which border Iran to the north, transport petroleum and natural gas from major producers including Saudi Arabia, Kuwait, Iraq, Qatar, Bahrain, the UAE and Iran itself. The majority of these energy exports are destined for Asian markets.

Any interruption to shipping through this strategic waterway creates significant ripple effects throughout global energy markets.

“The scale of what is at stake cannot be overstated,” said Hakan Kaya, senior portfolio manager at investment management firm Neuberger Berman. He explained that while oil companies could manage a partial slowdown lasting one to two weeks, a complete or near-complete blockage extending a month or longer would drive crude oil prices, currently trading around $70 on Monday, “well into triple digits” and push European natural gas prices “toward or above the crisis levels seen in 2022.”

The Strait of Hormuz forms a curved waterway measuring approximately 33 kilometers (21 miles) across at its most constricted point. It links the Persian Gulf with the Gulf of Oman, providing ships access to international waters and global destinations. Although Iran and Oman maintain territorial claims within the strait, international maritime law recognizes it as open waters accessible to all vessels. The United Arab Emirates, known for Dubai’s iconic skyline, is also positioned adjacent to this vital shipping lane.

Throughout history, the Strait of Hormuz has served as a crucial trade corridor, with ceramics, ivory, silk and textiles flowing from China through the region. In contemporary times, it accommodates massive oil tankers transporting petroleum and gas from regional producers. Most of these shipments reach Asian destinations, including China, which remains Iran’s sole remaining oil purchaser.

Although Saudi Arabia and the UAE operate pipelines that can bypass the strait, the U.S. Energy Information Administration notes that “most volumes that transit the strait have no alternative means of exiting the region.”

Previous threats to this shipping route have triggered global energy price increases, including during the Israel-Iran conflict in June.

While the strait remains officially open, vessel traffic has declined dramatically due to disrupted satellite navigation systems, according to data analytics company Kpler in a Sunday statement on X. The U.K. Maritime Trade Operations Center documented attacks on multiple ships in waters surrounding the strait and issued warnings about increased electronic interference affecting vessel tracking systems.

A drone boat loaded with explosives attacked a Marshall Islands-flagged oil tanker in the Gulf of Oman, the eastern approach to the strait, resulting in one crew member’s death, Omani officials confirmed.

Iran has been issuing threats to vessels approaching the Strait of Hormuz and is suspected of conducting several attacks.

In mid-February, Iran temporarily blocked portions of the strait, claiming the action was part of military exercises. Oil prices surged approximately 6% in subsequent days.

This closure represented a rare, possibly unprecedented shutdown of the waterway.

During previous periods of regional tension and warfare, Iran has periodically interfered with shipping through the narrow passage. During the Iran-Iraq war of the 1980s, both nations targeted tankers and other vessels, deploying naval mines that completely halted traffic at various times. However, Iran has not followed through on repeated threats to completely close the waterway since the 1980s, even during last year’s 12-day conflict when Israel and the United States conducted strikes on Iran’s nuclear and military facilities.