US-Iran Conflict Escalates. Strait of Hormuz Shutdown, How Much Room for Oil Prices to Rise?

TradingKey - On the evening of February 28 local time, Iran's Islamic Revolutionary Guard Corps announced a ban on all vessels passing through the Strait of Hormuz and issued warnings to several passing ships. Affected by U.S.-Israeli military actions and Iranian counterattacks, security risks in the area around the strait are extremely high, and navigation is currently unsafe.

In response to the ban, several major global oil companies and trading giants have officially announced the suspension of their oil and fuel tankers passing through the Strait of Hormuz, placing the global oil supply chain under severe strain.

The sharp escalation in geopolitical risks has directly triggered significant volatility in global crude oil markets.

At Monday's opening, WTI crude futures surged by more than 11%, while Brent crude rose by 13%, though gains narrowed later in the session.

Goldman Sachs analysts, including Daan Struyven, noted that the current real-time risk premium of $18 per barrel for crude is at the 98th percentile since 2005, while the call skew in the options market has reached its highest level in 15 years.

Why is the Strait of Hormuz so important?

The Strait of Hormuz is known as the "chokepoint" of global energy shipping because it serves as the primary conduit for Middle Eastern oil and gas exports; its status directly dictates the stability of global energy markets.

From a data perspective, its strategic importance is clear. As the essential export route for eight Gulf nations, including Iran, Iraq, and Saudi Arabia, these countries' combined average daily crude production in 2025 is approximately 25.61 million barrels, accounting for 24.5% of total global output.

Daily crude oil exports through the Strait of Hormuz average about 14 million barrels, representing 31%-34% of the world's total seaborne crude exports, with 75% of that volume destined for Asian markets.

In terms of natural gas, exports from the Middle East account for 42% of total global trade, with liquefied natural gas (LNG) shipped through the Strait of Hormuz representing 21% of global LNG trade. This waterway, which is only 40 kilometers wide at its narrowest point, handles approximately 20% of the world's total oil shipments, serving as a literal "main artery" for energy.

Historically, Iran has frequently used asymmetric means such as speedboats, drones, and missiles to threaten shipping, driving up regional maritime risks without triggering open conflict to demonstrate its ability to influence global energy markets, yet it has never truly blockaded the strait.

In response, the Gulf Cooperation Council has called on Iran to immediately cease such threats to ensure supply chain security and global energy market stability. Iran had previously announced a ban on all vessels passing through the Strait of Hormuz; tankers have now stopped transiting, and the strait is effectively closed.

Should the Strait of Hormuz descend into disorder, the shock to the oil market would far exceed any period following the 1979 Iranian Revolution.

The current suspension of traffic in the Strait of Hormuz shares similarities with the 1973 oil embargo, as both involve energy supply shocks triggered by Middle East conflicts that drive up oil prices, fuel global inflation, and heighten market risk aversion.

However, the nature of these shocks is fundamentally different. In 1973, Middle Eastern producers proactively launched an embargo accompanied by long-term production cuts, whereas the current situation involves short-term logistical disruptions caused by military deterrence; the scale of their impacts is not comparable.

Bob McNally, a White House energy advisor during the George W. Bush administration and an analyst at Rapidan Energy, warned that market traders are currently severely underestimating the threat of subsequent Iranian retaliation to global energy markets. He added that a prolonged closure of the Strait of Hormuz would inevitably trigger a global recession.

From the core logic of energy supply, global spare oil capacity is highly concentrated in Gulf countries, but the export of this capacity relies heavily on the Strait of Hormuz.

Once the strait is closed, new capacity cannot be delivered to global markets, effectively leaving it "locked" at the source. Furthermore, about 20% of global LNG exports transit the strait, mostly from Qatar, and there are currently almost no alternative transport routes for this gas supply.

McNally further analyzed that a closure would trigger a series of chain reactions. First, major energy-importing nations in Asia would engage in panic stockpiling, sparking the largest energy bidding war in history. Second, oil prices would be forced to levels high enough to destroy demand, which would ultimately lead to a recession, rebalancing the market by reducing energy consumption.

Market institutions generally believe that if the strait remains closed for an extended period, Brent crude prices could surpass $100 per barrel in the short term, potentially reaching $130-$150 per barrel in extreme cases, while LNG prices would re-challenge their 2022 record highs.

OPEC+ Emergency Meeting Signals Production Increase

Affected by the sudden military conflict, OPEC+ production increase plans have undergone significant adjustments. According to Bloomberg, the organization originally planned to approve a daily production increase of 206,000 barrels for April on Sunday, consistent with the pace of increases in the fourth quarter of last year. However, following the outbreak of conflict, the situation changed abruptly, and a source revealed that member states are considering an increase three to four times larger than originally planned.

As a core member of OPEC+, Saudi Arabia has taken preemptive action, recently accelerating crude exports to prepare for potential emergency supplies. This is not the first time Saudi Arabia has taken such steps; during U.S. strikes on Iranian nuclear facilities last year, Saudi Arabia also temporarily increased crude supply to stabilize the market.

However, OPEC+'s ability to increase production faces material constraints. According to International Energy Agency data, Saudi Arabia holds the world's largest spare capacity, capable of adding up to 1.8 million barrels per day. The UAE has emergency plans to release at least 1 million barrels per day. Overall, however, spare capacity is highly concentrated, leading the market to doubt the actual effectiveness of these production increases.

Helima Croft, head of commodity strategy at RBC Capital Markets, warned: Regardless of the size of the production increase OPEC+ announces, they may need to draw from inventories to fulfill those promises because spare capacity is extremely limited and almost entirely concentrated in Saudi Arabia.

Another issue is the logistics bottleneck. If the Strait of Hormuz remains closed, OPEC+ will struggle to deliver even if they have the capacity. Data shows that in 2025, the combined oil exports of Saudi Arabia, Iraq, and the UAE through the Strait of Hormuz will reach 13.1 million barrels per day; if the channel is blocked, new capacity cannot be successfully shipped to global markets, rendering production increase plans moot.