Why Iran won't block the Hormuz Strait oil artery even as war with Israel looms

Following Israeli strikes on Iran, concerns have risen about potential Iranian retaliation targeting the Strait of Hormuz, a critical transit point for approximately 20 million barrels of oil per day; however, analysts believe a full-scale disruption is unlikely due to factors including potential retaliation against Iran, pressure from China (a major importer of Iranian oil), and the presence of the U.S. Fifth Fleet, though limited disruptions via tanker attacks or mining remain a possibility. Despite the unlikelihood of a full closure, crude futures initially jumped as much as 13% following the strikes, reflecting market sensitivity to geopolitical risk.

Analysis

Recent Israeli strikes on Iran have reignited concerns regarding potential Iranian retaliation targeting the Strait of Hormuz, a critical chokepoint through which approximately 20 million barrels of oil and oil products, or nearly one-fifth of global oil shipments, transit daily. Despite this, market analysts largely deem a full-scale, prolonged closure of the waterway unlikely and potentially physically impossible. Key deterrents include the lack of net benefit for Iran, especially as its oil infrastructure has not been directly targeted, and the high probability of further retaliatory actions. Furthermore, such a move would likely draw significant opposition from China, Iran's largest oil customer (reportedly accounting for over three-quarters of its oil exports) and largest trade partner, which has a vested interest in uninterrupted oil flows and stable prices. Experts like Anas Alhajji note that disrupting the strait would disproportionately harm Iran's allies and Iran itself, as most of its daily consumption goods arrive via this route. The strait's physical characteristics, being 35 to 60 miles wide and largely within Omani territory, also present challenges to a complete blockade by Iran alone, with alternative routes through UAE and Omani waters available. The presence of the U.S. Fifth Fleet in Bahrain is another significant factor limiting Iran's capability to close the strait for an extended period. While a full closure is improbable, analysts like Helima Croft of RBC Capital Markets acknowledge the potential for Iran to engage in disruptive activities such as attacks on tankers or mining operations. Historical precedents in 2011-2012 and 2018 saw Iran threaten closure without acting. The market's sensitivity to these tensions was evident when crude futures surged by as much as 13% following the Israeli strikes, with Brent futures rising 6.5% to $73.88 per barrel and WTI increasing 6.7% to $72.57 per barrel at the time of reporting, underscoring the geopolitical risk premium. While most analysts view a full closure as a 'last resort' option contingent on direct U.S.-Iran military engagement, some, like Kpler's Amena Bakr, suggest that in the current extreme situation, the possibility, however remote, should not be entirely dismissed.

Key Decisions for Investors

• Investors should closely monitor geopolitical developments in the Middle East as they directly influence oil price volatility, evidenced by the recent up to 13% spike in crude futures following Israeli strikes.
• While a complete shutdown of the Strait of Hormuz is considered unlikely by most experts due to significant economic and military deterrents, including pressure from China and the presence of the US Fifth Fleet, the potential for limited disruptions like tanker attacks or mining could introduce short-term price surges and supply anxieties.
• Consider maintaining a cautious stance on energy-related assets, recognizing that heightened tensions will likely sustain a risk premium on oil prices, even if a full-scale supply disruption remains a low-probability event; assess portfolio exposure to such volatility.
• Factor in China's significant economic leverage over Iran as a mitigating influence against a full Strait closure, but remain aware that escalating regional conflicts could still lead to broader market instability beyond immediate oil supply concerns.