Iran’s parliament has approved the closure of the strategically crucial Strait of Hormuz, a vital waterway for global oil shipments, in a significant escalation of tensions in the Middle East region.
This decision, if effected, could push global oil prices up from below $80 to $150 per barrel.
The decision comes after a US-led airstrike targeted Iranian nuclear facilities, prompting vows of retaliation from Tehran.
The Strait of Hormuz
The Strait of Hormuz is a narrow passage connecting the Persian Gulf to the Arabian Sea, handling around 20% of the world’s oil and 20% of global liquefied natural gas (LNG) trade.
The waterway is crucial for the export of oil from major producers such as Saudi Arabia, Iraq, and Iran.
Any disruption to shipping through the strait would have far-reaching implications for global energy markets.
Potential Consequences of Closure
According to analysts, a complete closure of the Strait of Hormuz could lead to a surge in crude oil prices to above $120 per barrel, potentially even reaching $150 per barrel.
This would have significant consequences for global inflation, economic growth, and energy security.
“As markets reopen on Monday, investors are bracing for sharp volatility, with crude oil prices expected to surge and inflation forecasts now under intense scrutiny,” says Nigel Green, CEO of deVere Group.
Impact on Global Economy
The closure of the Strait of Hormuz would not only affect oil prices but also disrupt global supply chains, leading to increased shipping costs and delays.
India, which relies heavily on oil imports, would be particularly vulnerable, with potential implications for the country’s economy and currency.
According to the US Energy Information Administration (EIA), 84% of crude oil and condensate exports passing through the Strait of Hormuz went to Asian markets in 2024, with India, China, Japan, and South Korea being the top destinations.
What you should know
While Iran has previously threatened to close the Strait of Hormuz, it has never followed through.
- Analysts believe that a closure would be a last resort, given the potential consequences for Iran’s own economy and global trade.
“There is no net benefit for Iran in closing the Strait. It would hurt its own exports to China, its biggest customer,” notes Anas Alhajji, managing partner at Energy Outlook Advisors.
However, with tensions escalating, the possibility of a closure cannot be entirely ruled out.
