After U.S. and Israeli airstrikes on Iran, the Strait of Hormuz, a key artery for global energy logistics, has been effectively sealed, but international oil prices are defying market expectations and staying below $100 per Barrel.
As tensions rise across the Middle East, events are unfolding exactly along the "worst-case scenario" experts warned about. Qatar's world-largest liquefied natural gas (LNG) plant and major refineries in Saudi Arabia have been attacked, and about 150 oil tankers are stuck in the Strait of Hormuz, which handles 20% of global oil and gas shipments.
The market, however, is reacting as relatively muted compared to past oil shocks. According to the Financial Times (FT) on the 4th (local time), since the fighting began, international oil prices have risen about 30%. Brent crude climbed to $85 per Barrel, hitting the record high since July 2024. But that is well below the $128 touched right after Russia's invasion of Ukraine.
◇ U.S. output growth and lower dependence
The main reason the market shock is limited compared to the past is a shift in the structure of the global energy market. Unlike during the oil shocks of the 1970s, advanced economies today are far less dependent on oil. Back then, supply disruptions quickly translated into a broad shock to the world economy. In fact, during the 1973–74 oil embargo by Arab producers, prices surged about 260%, and after the 1979 Iranian Revolution, they rose about 160%.
But the situation is different now. The United States has emerged as the world's largest oil producer, and new supply from Guyana, Brazil and Canada has lowered reliance on the Middle East compared to the past, FT said. There is also an expectation that the U.S. government, ahead of the November midterm elections, will release crude from the Strategic Petroleum Reserve (SPR) to tamp down inflation, helping steady the market.
◇ An oil market schooled by crises... Detours and inventories are the backstop
Analysts also say the oil market's ability to respond has improved markedly. After the COVID-19 pandemic and Russia's 2022 invasion of Ukraine, global crude logistics were reconfigured, and traders became adept at quickly rerouting tankers. Saudi Arabia and the United Arab Emirates (UAE) have bypass pipelines that allow them to export 9 million Barrels a day without passing through the Strait of Hormuz. According to energy analytics firm Vortexa, China holds crude inventories that could last about 124 days even without new supply. Globally, inventories of about 2 billion Barrels are providing a buffer that can partly offset immediate Middle East–driven supply disruptions, FT reported.
Still, conditions could change if the conflict drags on. Saul Kavonic, an analyst at MST Financial, estimated that a two-week closure of the Strait of Hormuz could block about 250 million Barrels of crude supply. "In that case, some Gulf states may have to halt production due to a lack of storage capacity, and prices could rise above $100," he said.