Can Iran fully block the Strait of Hormuz?

• Tensions around the Strait of Hormuz intensified after Iran’s Revolutionary Guard threatened attacks on vessels attempting to pass through the strait, triggering a rise in oil and gas prices and worsening shipping conditions.
• Markets remain relatively calm because investors believe a full and sustained blockade is unlikely due to Iran’s limited military capabilities and the economic costs such a move would impose on Iran and its key trading partners.
• Asian economies would be the most affected by any disruption, with China receiving about 38 percent of the oil transported through the strait, followed by India, South Korea, Japan, and other Asian countries.
• Current global oil supply conditions, including spare production capacity and inventories, could help stabilize the market for several weeks, although prolonged conflict would likely push energy prices significantly higher.
• Around 40 supertankers are currently stranded in the Persian Gulf, highlighting the strategic importance of the Strait of Hormuz, through which roughly one fifth of global oil supply and LNG trade passes each day.
• Brent crude oil has gained over 14 per cent since Monday, reaching USD 85 per barrel on Tuesday. The US dollar is benefiting on the currency market. So far, Asian stock markets have lost the most (KOSPI is down 12 per cent today), while the sell-off is also evident in Europe (DAX lost 3.5 per cent yesterday) and moderate in the US.

In recent hours tensions around the Strait of Hormuz have risen again after a statement by the commander of the Islamic Revolutionary Guard Corps, who announced that the route had been closed and threatened attacks on vessels attempting to pass through this strategic chokepoint. The reaction of the markets was immediate. Oil and gas prices increased, and the situation for shipping in the region deteriorated further.

Despite this, we are not seeing a classic market panic. The main reason is the widespread belief among investors that a full and lasting blockade of the Strait of Hormuz remains an unlikely scenario. The market assumes that Iran neither has sufficient economic incentives nor the full military capabilities required to maintain a complete closure of this crucial energy corridor.

From an economic perspective such a move would also be unfavorable for Iran itself as well as for its key trading partners, including India and China. From a military standpoint maintaining a full blockade would require significant resources and a sustained escalation involving sea mines, torpedoes, and drones. So far the incidents observed have been selective and episodic rather than part of a broad and systematic operation.

Data on oil flows through the Strait of Hormuz clearly show which regions would be most exposed to potential disruptions. The largest recipient of crude transported through this route is China, which accounts for roughly 38 percent of the total volume passing through the strait.

India is the second largest destination, receiving about 15 percent of the oil shipped through this corridor. Other Asian economies together account for around 14 percent, followed by South Korea with 12 percent and Japan with approximately 11 percent.

Only a very small share of oil transported through the Strait of Hormuz goes to Europe, which represents roughly 3 percent of total flows. These figures indicate that any disruption in this region would hit Asian economies the hardest, as they remain the most dependent on energy supplies from the Middle East.

Another factor moderating the market reaction is the current supply situation in the global oil market. There is still some surplus supply, and available spare production capacity together with existing inventories could, according to some estimates, stabilize the market for at least three weeks without severe disruptions. However, if the conflict were to persist for a longer period, the upward pressure on energy prices could intensify significantly.

The situation is somewhat different in the European gas market. Gas storage levels remain historically low, averaging around 30 percent, and in Germany and France they are only slightly above 20 percent. This explains the stronger reaction of gas prices and the greater pressure on European equity markets.

A scenario involving a full blockade would have serious consequences for all sides. Iran would have to expect an immediate and decisive military response. The Gulf states would face disruptions to their exports of crude oil and liquefied natural gas, which would translate into declining revenues. Global financial markets would likely experience an almost immediate shock through rising commodity prices, inflationary pressure, and a sharp shift in expectations regarding monetary policy.

It is important to note, however, that Iran does not need to impose a complete blockade in order to create significant disruptions. Even the current tensions have already caused a sharp increase in insurance and freight costs for vessels linked to Israel or the United States, in some cases rising twenty or even thirty times. Some insurers have temporarily suspended coverage or are refusing to insure new vessels until the situation stabilizes.

The situation was partially stabilized by a statement from US President Donald Trump, who announced that if necessary the US Navy would escort tankers passing through the Strait of Hormuz. In addition, the US government plans to introduce a system of insurance guarantees for ships transporting oil and other strategic goods.

The president announced that the government backed financial institution US International Development Finance Corporation will offer such insurance at what he described as a very reasonable price, in order to maintain the flow of energy and support international trade. In a post on social media he emphasized that regardless of the circumstances the United States will ensure the free flow of energy worldwide. The goal of these measures is to reduce the risk of a global energy crisis. Nevertheless, investors are aware that implementing such a mechanism may take time and that transportation costs for energy are likely to increase.

At present around 40 very large crude carriers remain stranded in the Persian Gulf. Each of these vessels can transport roughly 2 million barrels of oil, which means that potentially around 80 million barrels of crude are currently stuck in the region.

The strategic importance of the Strait of Hormuz for global energy markets is enormous. Every day approximately 20 million barrels of crude oil and petroleum products pass through this narrow passage, representing about one fifth of global oil production and more than one quarter of the world’s seaborne oil trade.

In addition, roughly one fifth of global liquefied natural gas supplies also transit through the strait, much of it originating from Qatar.