Iran, Hormuz, and Disruption: Why Oil Prices May Blink but Not Break

Tensions in the Strait of Hormuz is dominating global headlines as Iran signals the possibility of closing its territorial waters in the northern half of the passage. This narrow waterway moves nearly 20 percent of global daily oil consumption, approximately 17 to 18 million barrels per day. Given its strategic importance, markets are right to pay attention.

However, a unilateral Iranian closure of only the northbound lane is unlikely to cause any significant or lasting disruption to global oil flows.

Here is why the fundamentals remain steady despite the noise:

🛢 The Strait operates with two navigational lanes. While Iran controls the northern channel, the southern lane lies entirely within Omani territorial waters. This route remains open and legally protected under international maritime law, and is regularly used by tankers with naval support in place. When tensions rise, vessels simply shift to the southern route.

🛢 Key Gulf producers have invested heavily in alternatives. Saudi Arabia’s East-West Pipeline can transport up to 7 million barrels of oil per day from the eastern oil fields to ports on the Red Sea. The UAE’s Habshan to Fujairah pipeline can carry around 1.8 million barrels daily directly to the Arabian Sea. These routes are operational and significantly reduce dependence on the Strait.

🛢 Global reserves and emergency buffers are robust. The OECD countries collectively hold more than 1.5 billion barrels in strategic reserves. The United States alone maintains over 340 million barrels in its Strategic Petroleum Reserve. In addition, OPEC producers retain spare production capacity that can be deployed quickly if needed.

🛢 Oil prices are influenced more by sentiment than by reality. History shows that prices tend to spike on geopolitical fears but stabilise once it becomes clear that physical supply remains unaffected. A partial closure of Iranian waters is not a full blockade and does not constitute a sustained threat to oil markets.

A serious disruption would require Iran to escalate far beyond current rhetoric, which would almost certainly provoke a coordinated international military and economic response. As it stands, this is more about optics than operational impact.

In today’s energy system, markets may blink at the sound of a threat, but the flows continue and the fundamentals hold.

Written by Fredrick Owusu(CGIA)