Within just a few hours, after the US and Israeli strikes on Iran, Brent crude surged more than 7% and approached $80. WTI also climbed over 7%. Suddenly, the entire market turned its attention to the Middle East.
But the issue is not simply that prices rose.
The real question is why they rose. And more importantly… what could come next.
Because today we are not just talking about an increase in oil prices. We are talking about how a 33 kilometer strait can shape the global economy.
THE ESCALATION IN THE MIDDLE EAST
Following the American and Israeli strikes on Iranian targets, the situation escalated dangerously. Donald Trump spoke of a military operation that could last for weeks.
Here is the critical point. Markets do not react only to what is happening. They react to what they fear might happen.
And what do they fear? That the conflict could disrupt the global oil supply.
That is why we immediately saw Brent approaching $80, oil stocks strengthening, and companies such as Exxon Mobil ($XOM) and Chevron ($CVX) moving higher. The market is adding what is known as a risk premium.
And this is where the Strait of Hormuz enters the picture.
THE STRAIT OF HORMUZ
The Strait of Hormuz lies between Oman and Iran. Approximately 13 to 15 million barrels of oil pass through it every day. That represents about 20% of global consumption and more than 30% of global seaborne oil trade. At the same time, massive volumes of liquefied natural gas also transit through the same passage.
Countries such as Saudi Arabia, the United Arab Emirates, Iraq, and Kuwait depend on this route to export their production. If this strait is blocked, even temporarily, the consequences would be immediate.
Most analysts believe that a full closure is not the most likely scenario, since the United States has the military capability to prevent such a move. However, it does not need to close entirely. Isolated attacks on tankers, warnings to commercial vessels, or heightened risk in the region would be enough to create disruption.
And when shipping companies are afraid, they stop or delay operations. When they stop, supply declines. And when supply declines, prices rise.
Now let me consider the more difficult scenario. If the Strait of Hormuz remains closed for an extended period, or if there is a serious attack on energy infrastructure in Saudi Arabia or other Gulf countries, then we are talking about a genuine supply shock.
In such a scenario, prices could exceed $100 per barrel.
Some analysts are already discussing the possibility of triple digit oil. This is where comparisons are made to the 1970s, to the Arab oil embargo and the Iranian Revolution, when the global economy experienced an energy shock, inflation surged, and a recession followed.
We are not saying this will happen. But we are saying that the possibility exists, and the market is aware of it.
THE DOMINO EFFECT ON GLOBAL TRADE
And it does not stop with oil.
Major container shipping companies such as Maersk, Hapag Lloyd, CMA CGM, and MSC have already suspended transits through Hormuz and have frozen routes through Bab el Mandeb and the Suez as well. Many vessels are being forced to sail around Africa.
This means longer voyages, higher fuel costs, delays, and more expensive freight rates. And when transportation costs rise, product prices rise. In other words, inflation.
We are not talking only about an energy crisis. We are talking about a potential global trade disruption. Maritime trade does not have easy alternatives. If it is seriously disturbed, the domino effect could impact everything from raw materials to supermarket shelves.
INVESTMENT IMPLICATIONS
So what does all this mean for investors? The key factor is duration.
If the crisis lasts only a few days, much of the fear may already be priced in. But if it lasts for weeks or escalates further, we could see pressure on markets, a return of inflationary pressures, and delays in interest rate cuts.
