Middle East conflict puts world’s most critical energy chokepoint in focus

Key points:

• The oil market remains highly volatile as geopolitical headlines collide with the physical reality of disrupted energy flows from the Persian Gulf.
• The Strait of Hormuz represents the most serious threat to global energy supply since the 1970s, with close to one-fifth of global oil consumption moving through the chokepoint.
• Diesel, jet fuel and LNG prices have reacted the most as the disruption directly impacts refining margins and global gas flows. 
• Brent crude remains caught between two scenarios: renewed supply disruption pushing prices above USD 100, or credible de-escalation sending prices back toward USD 80.

Oil prices remain caught in a wide and unstable range as markets attempt to navigate one of the most serious threats to global energy supply in decades. Monday’s sharp reversal underlined how quickly sentiment can swing, but it did little to remove the underlying supply risks that continue to dominate the outlook.

Oil prices underwent their biggest slump on Monday since the pandemic era before steadying above USD 90. The move initially started on speculation about a coordinated release from strategic petroleum reserves but accelerated following comments from President Trump—facing political backlash at home and abroad and rising concerns over fuel affordability—who suggested the Iran war could end sooner than previously feared. He also indicated that oil-related sanctions, potentially involving Russian exports, might be waived while the U.S. Navy would escort tankers through the Strait of Hormuz.

Despite these developments the conflict shows few clear signs of easing. Iran has so far shown little willingness to halt its retaliatory actions, while military strikes and counterstrikes across the region have now drawn more than a dozen countries directly or indirectly into the crisis. As a result, the crude market remains in flux, with traders balancing the risk of further escalation against the possibility that diplomatic pressure could eventually stabilize the situation.

At the centre of the market’s concern lies the Strait of Hormuz. The narrow waterway connecting the Persian Gulf with the Arabian Sea remains the single most important chokepoint for global energy flows. Under normal circumstances roughly 20 million barrels of crude and refined products pass through the strait each day, equivalent to about one‑fifth of global oil consumption and roughly a quarter of global seaborne oil trade. In addition, nearly 20% of global LNG exports, primarily from Qatar, also transit the route.

This concentration of flows means that any disruption to shipping through the strait has an immediate and disproportionate impact on global supply expectations. Unlike many previous geopolitical disruptions, where lost supply from one region could be replaced elsewhere, the challenge with Hormuz is that it represents the route itself rather than a single producer. Even if Gulf producers maintain output, exports cannot easily reach global markets if shipping through the strait is impaired.

There are limited alternatives. Saudi Arabia and the United Arab Emirates operate pipelines that can bypass the strait, but their combined spare capacity is only a fraction of the volumes that normally move through Hormuz. In addition, a large share of the world’s spare production capacity is located inside the Persian Gulf. Should exports become constrained for an extended period, the global market could therefore lose access not only to existing production but also to much of the spare capacity normally used to stabilize supply shocks.

These dynamics explain why the current crisis is increasingly being compared with the oil shocks of the 1970s. While the global energy system today is far more diversified, the sheer scale of flows moving through the Persian Gulf means that a prolonged disruption would still carry significant economic consequences.

Interestingly, the strongest reaction has not been in crude itself. Instead, diesel, jet fuel and LNG markets have experienced some of the most dramatic moves. The reason lies in the nature of the crude supply being disrupted. Much of the oil exported from the Gulf consists of medium‑sour grades that are particularly well suited for producing middle distillates such as diesel and jet fuel.

At the same time, the Persian Gulf has seen a rapid expansion in refinery capacity over the past decade. As a result, the disruption is not only trapping crude well suited for producing middle distillates, but also refined products. In recent years, Middle Eastern refineries have become increasingly important suppliers of diesel and jet fuel to global markets, including Europe where they have helped replace sanctioned Russian barrels.

The situation is further complicated by the importance of the region in global LNG supply. Qatar is one of the world’s largest exporters of liquefied natural gas, and almost all of its shipments rely on safe passage through the Strait of Hormuz. As shipping risks have increased, LNG prices in both Europe and Asia have surged, reflecting fears that gas supply disruptions could compound the broader energy shock.

Beyond the physical disruptions, policymakers are also watching oil prices closely for their potential economic consequences. Historically, crude prices above USD 110 to USD 120 per barrel have tended to coincide with weakening demand as high fuel costs begin to weigh on economic activity. Sustained prices at these levels carries an increased economic risk, at a time where global economic activity already remains challenged by geo-political shifts and tariff related obstructions to trade. 

The United States remains particularly sensitive to rising fuel prices despite its position as the world’s largest oil producer. American consumers are still heavily reliant on gasoline, and higher crude prices feed relatively quickly into retail fuel costs, with the national average diesel price rising 26% in the past week, while gasoline has jumped 18%. This dynamic partly explains the urgency with which policymakers are attempting to contain the market’s reaction through strategic reserve discussions and efforts to stabilize shipping routes.

For now, the crude market remains suspended between two scenarios. Continued disruptions to regional energy flows and further escalation could quickly push Brent crude back toward or above USD 100 per barrel, particularly if shipping through Hormuz remains constrained. Evidence that Gulf producers are shutting in output due to storage limitations will continue to underpin prices until its safe to resume exports. 

Conversely, a credible move toward de‑escalation—combined with the restoration of normal shipping through the strait—could see prices retreat toward the USD 80 area, with the current drainage of global inventories keeping prices elevated in the coming months compared with previous expectations. Such a move would likely require not only political progress but also clear evidence that tanker traffic, insurance coverage and refinery supply chains are returning to normal.

Until greater clarity emerges, volatility is likely to remain elevated. The market will continue to monitor tanker movements through Hormuz, refining margins for diesel and jet fuel, LNG prices and the willingness of Gulf producers to maintain output under increasingly challenging logistical conditions.

The current crisis serves as a reminder of the continued importance of geopolitical risk in global energy markets. Even in an era of growing energy diversification, the Strait of Hormuz remains a critical artery for the world’s energy system—and any disruption there will reverberate far beyond the region.