The price of Brent crude oil surged past $120 a barrel on Monday, reaching levels not seen since 2022, as escalating tensions in the Middle East triggered fears of a significant disruption to global oil supplies. The surge followed attacks on infrastructure in Bahrain, Qatar, and Saudi Arabia, coupled with the de facto closure of the Strait of Hormuz, a critical chokepoint for oil tankers.
The crisis stems from the intensifying conflict surrounding Iran, following coordinated strikes by the United States and Israel against Iranian targets. In response, Iran has increased its destabilizing actions, including drone attacks targeting energy facilities in neighboring Gulf states. According to analysts at JP Morgan, while attacks have so far avoided key exploration and production infrastructure, storage and distribution networks are becoming critical vulnerabilities. “The tanks on land and floating capacity in the Gulf are filling up, forcing additional production shutdowns,” they warned.
The Strait of Hormuz, through which approximately 20 million barrels of oil pass daily – roughly 20% of global supply – is now largely blocked, forcing oil producers to rely on pipelines running through Saudi Arabia, the United Arab Emirates, and Iraq. Though, these pipelines have insufficient capacity to handle the volume previously transported via the strait, leading to a build-up of crude and prompting production cuts. Iraq, the UAE, and Kuwait have already begun reducing output due to limited storage capacity.
“The oil markets have entered panic mode,” stated Norbert Rücker, Head of Economics and Next Generation Research at Julius Baer. The disruption has driven Brent crude prices up 39% since the start of the US-Israel campaign against Iran, while European natural gas prices, benchmarked by the TTF contract in the Netherlands, have risen by 88%.
The European Union and leaders from thirteen Middle Eastern countries held an emergency videoconference on Monday to discuss mitigating the impact of the attacks and the closure of the Strait of Hormuz, according to a statement released by the European Council President António Costa and European Commission President Ursula von der Leyen. The EU emphasized the need for a diplomatic solution to the conflict and offered to assist in de-escalation efforts.
Saudi Arabia has already begun curtailing oil production in response to storage constraints caused by the blockage, and is diverting some supplies through the Red Sea, according to reports. Traffic through the Strait of Hormuz has plummeted by 90%, further exacerbating concerns about supply shortages.
Analysts at Citi estimate that current disruptions are resulting in a loss of between 11 and 16 million barrels of oil per day, compared to the 20.5 million barrels that typically flow through the region. They project potential supply reductions of between 7 and 11 million barrels of crude and 3.8 to 5 million barrels of refined products.
While some tankers are still attempting to navigate the Strait – a Greek-flagged vessel carrying a Saudi Arabian cargo reached India on Monday – insurance rates and freight costs have soared, making shipments increasingly expensive and risky.
The most severe scenario, according to analysts, involves Iran mining the Strait of Hormuz. Such an action would necessitate a lengthy and dangerous demining operation, potentially taking two to three months to complete, even after hostilities cease, according to Ronald Temple, Chief Market Strategist at Lazard.
Despite the escalating crisis, some investment firms remain optimistic that the conflict will not be prolonged. UBS analysts suggest that a swift resolution and the resumption of normal oil flows could lead to a rapid price decline, although prices may remain above pre-conflict levels due to the time required to restore production and exports. However, they also acknowledge that the market’s volatility and growing consumer anxieties could drive prices even higher until demand moderates.
As of Tuesday, the situation remains fluid, with no immediate indication of a de-escalation. The EU and regional leaders continue to call for a diplomatic solution, but the path forward remains uncertain.
