The whole world is watching this critical energy chokepoint as Iran conflict enters more dangerous phase

By Joseph Adinolfi

Traffic through the Strait of Hormuz has dropped off amid warnings from the Iranian Revolutionary Guard. What happens next could have major implications for the global economy.

One-fifth of the world's energy supplies transit through the Strait of Hormuz, shown in a photo taken Feb. 25.

All eyes are now on the global market for crude oil.

The big question: Will this weekend's attack on Iran - which the U.S. military has called Operation Epic Fury - result in an increase in oil prices that is only temporary and relatively measured? Or will energy prices surge, revitalizing inflation and spreading economic misery around the world?

Whatever happens next, the impact for oil prices will largely depend on what happens in the Strait of Hormuz, a narrow aquatic passageway through which one-fifth of the world's energy trade passes, according to data from the U.S. Energy Administration. That includes both crude oil and liquified natural gas.

Oil prices surged more than 7% (CL.1) immediately after the market reopened Sunday evening in New York. Over the weekend, synthetic perpetual oil-futures trading on Hyperliquid, a decentralized crypto-based trading platform that is closed to U.S. investors, saw a big spike, as traders rushed to the 24/7 cryptocurrency market to register reactions to the latest conflict. Whether this will carry over into the global market for commodity futures remains to be seen.

If Iran moves to blockade the strait, crude prices could skyrocket, economists say. Bloomberg Economics has projected that if the Strait of Hormuz is blocked, oil prices could shoot to $108 a barrel. Others say the move could be even bigger. On Friday, U.S.-traded crude for April delivery settled at around $67 a barrel, Dow Jones Market Data showed.

See: As investors wait for crude-oil trading to reopen amid Iran conflict, shares of the world's biggest producer are climbing

Iranian government officials reportedly told Al Jazeera on Sunday that the country has no plan to close the strait. But a day earlier, a European Union official told Reuters that vessels crossing the strait had received high-frequency transmissions from the Iranian Revolutionary Guard Corps warning them not to attempt passage. The highest levels of the Iranian government would need to act in order to close the strait. That hasn't happened - at least not yet.

Even so, energy-market analysts say there has been a notable drop in tanker traffic through the strait. As of late last week, 20 million barrels of crude oil flowed through the strait in a day. By early Saturday, that number appeared to have dropped to effectively zero, according to a chart from Rystad Energy.

President Donald Trump's geopolitical playbook, according to Mizuho strategist Jordan Rochester, has so often gone something like this: first, a geopolitical shock, then an abrupt jump in oil prices, followed by immediate or nearly immediate de-escalation. The jump in prices, and any declines in risk assets like stocks, has, as the episode plays out, quickly reversed.

Whether that pattern holds this time will be critical to guiding the reaction in global markets over the coming days and weeks.

The fact that Iran has already launched retaliatory strikes not just against the U.S. and Israel but on assets situated in the United Arab Emirates, Saudi Arabia, Jordan and other Western allies in the region, suggests this conflict won't be as quick to resolve as the one last June, said Jorge León, senior vice president and head of geopolitical analysis at Rystad Energy. The U.S. and Israel in June specifically targeted Iranian nuclear facilities, which Trump said at the time had been "completely and totally obliterated."

In commentary shared with MarketWatch, León wrote that, this weekend, "Iran has retaliated in a far more aggressive and expansive manner than in prior exchanges, targeting US military bases in the region and even conducting attacks on its key Gulf allies."

This fact, according to León, "marks a structural widening of the conflict beyond contained or symbolic strikes."

What you should know about the Strait of Hormuz

The Strait of Hormuz is a narrow water passage located between Oman and the United Arab Emirates on one side and Iran on the other. It is the main conduit for oil and other energy products like liquefied natural gas as they flow between much of the Persian Gulf and Asia, Africa and beyond.

See: Iran conflict risks Strait of Hormuz standstill and sparks talk of $100-a-barrel oil

At its narrowest point, it is roughly 20 miles wide, with shipping lanes only 2 miles wide. That leaves it vulnerable to mining and other military measures that could effectively close the passageway to naval traffic.

The map below of Iranian energy infrastructure, courtesy of Rystad Energy, shows the strait near the bottom-right corner.

Muyu Xu, an analyst at Kpler, a data intelligence and analytics platform, has estimated that even a one-day strait blockage could send crude into the $120-a-barrel to $150-a-barrel range.

In the past, Iran has shied away from trying to close the strait because such a move would be a blunt instrument that would hurt adversaries and allies alike, including China, a major buyer of Iranian oil, according to several analysts.

But now that the U.S. and Israel have killed the country's supreme leader, Ayatollah Ali Khamenei, along with, reportedly, dozens of senior military commanders, the Iranian regime could decide that such a desperate measure might be its best shot at forcing the U.S. and Israel to back down.

Already, the strait has been effectively closed for the first time in modern history, said Jordan Rochester, a strategist at Mizuho Bank in London. Maritime insurers have pulled coverage, and several vessels attempting to transit through the strait have turned back.

Saudi Arabia and the UAE can reroute some of their crude supply through pipelines, but this will only be able to compensate for about one-third of the loss of crude shipments through the strait, according to Rystad's León.

"Whether the strait is closed by force or rendered inaccessible by risk avoidance, the impact on flows is largely the same," León said.

-Joseph Adinolfi

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03-01-26 1837ET