WHAT IS HAPPENING?
Tensions are rising in the Middle East. Mass protests in Iran are on the rise, the government has shut down internet access countrywide as the military engages with Iranians on the streets, and the U.S. is evaluating if and what actions it might take.
What does this mean for global oil prices? The geopolitical risk premium embedded in global oil prices for so many years evaporated in 2025 once OPEC+ began adding to the global oil supply, creating an oversupplied global oil market.
With rising tensions in Iran, geopolitical risk could again affect the oil market due to the region’s strategic geography. In June, we highlighted the importance of the Strait of Hormuz to global oil and energy markets, noting its critical role in worldwide crude shipments. Here, we focus on its location and the potential impact on oil prices of various actions Iran might take.
WHAT THIS MEANS FOR OIL MARKETS
The escalating geopolitical risk will likely push oil prices higher as the global markets brace for Iran’s response. A major action—such as an attempt to close the Strait of Hormuz—could trigger an immediate global energy supply crisis.
WHY THE STRAIT OF HORMUZ MATTERS
The Strait of Hormuz is 21 miles wide at its narrowest point. Approximately 20% of global oil consumption and 20% of liquefied natural gas (LNG) exports flow through the Strait, making it one of the world’s most critical pieces of energy infrastructure.
WILL IRAN CLOSE THE STRAIT?
The Iranian Parliament has voted in favor of closing the Strait of Hormuz in the past, but the decision lies with Iran’s Supreme National Security Council.
While the Strait has never been fully blocked, Iran has previously disrupted traffic via:
- Harassment, seizure, or attack on shipping vessels in the Gulf by the Islamic Revolutionary Guard Corps (IRGC)
- Deployment or threat of naval mines at the Strait’s narrowest point
However, a full and sustained closure remains unlikely due to several key factors:
- Iran exports ~1.5 million barrels of oil per day, vital for government revenue
- China, the primary buyer of Iranian oil, depends on these flows for ~15% of its total oil imports
- The U.S. Navy Fifth Fleet, based in Bahrain, maintains a strong regional presence, including minesweepers and amphibious assault ships equipped to secure maritime traffic
While short-term disruptions are possible, we believe prolonged closure of the Strait is highly unlikely.
POTENTIAL IMPACTS ON OIL PRICES
We outline four possible market scenarios based on developments in the Middle East:
Each scenario reflects increasing levels of supply risk and geopolitical uncertainty. The most severe outcome—an extended Strait closure—could result in a global energy crisis and a rapid surge in prices. As we keep a close eye on what the Iranian government will do in response to civilian protests, we also watch how civil unrest may affect the country’s management of the Strait.
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