Why all eyes are on the Strait of Hormuz, a 90-mile strip critical to global oil prices

• US strikes on Iran's nuclear sites are raising fears of Tehran's retaliation and oil disruption.
• For years, Tehran has threatened to close the Strait of Hormuz, a key energy shipping route to its south.
• A blockade would hit Asian markets hardest, with global high prices also affecting the US.

Global investors are on alert about a 90-mile sea passage in the Middle East, fearing that any block of the Strait of Hormuz could derail global shipping and oil.

Tensions in the Middle East escalated sharply after the US struck Iran's nuclear facilities on Sunday, prompting fears of retaliation from Tehran. Beyond concerns about defense and security, markets are concerned about the fallout for oil prices and the global economy should Iran block shipping in the Strait of Hormuz — a threat Tehran has repeated for years.

"If Iran chooses to blockade the Strait of Hormuz, it'd be categorically negative," Kyle Rodda, a senior financial markets analyst at Capital.com, told Business Insider.

"In the worst-case scenario, it would be incredibly impactful: higher fuel prices, higher inflation, slower growth, and interest rates higher than where they'd otherwise be," Rodda said.

What is the Strait of Hormuz?

One of the most geopolitically sensitive maritime routes, the Strait of Hormuz is just 21 miles across at its narrowest point. It connects the Persian Gulf to the Indian Ocean, with Iran to its north and the United Arab Emirates and Oman to its south.

According to the US's Energy Information Administration, the Hormuz is one of the world's busiest shipping lanes, carrying about 20 million barrels of oil a day.

Most energy shipments through the Strait of Hormuz have no other means of exiting the Persian Gulf, the starting sea point for major oil producers like Saudi Arabia to export their energy to the rest of the world.

How much shipping goes through the Strait of Hormuz?

About a quarter of seaborne oil and a fifth of global liquified natural gas trade moves through the Hormuz, so any disruption to shipping would hit the energy markets hard.

"The bombing of Iranian nuclear facilities by the US over the weekend increased supply risks significantly for the oil and LNG market," wrote Warren Patterson, the head of commodities strategy at ING, on Monday.

Can Iran really close the Strait?

Iran doesn't have the legal authority to shut down marine traffic in the Hormuz. But it could disrupt the movement of vessels by other means, for example by damaging oil and shipping infrastructure.

On Sunday, the Iranian parliament voted to close the Strait of Hormuz in retaliation against the US's action. The final decision still lies with the country's top security officials, according to Iran's state-owned Press TV.

Analysts said they think an Iranian blockade is probably more about political posturing than real action.

"While the headlines sound dramatic, the reality is that Iran's parliament holds no executive power over military or strategic decisions, particularly not ones with such far-reaching geopolitical and economic consequences," Dilin Wu, a research strategist at Pepperstone, told BI.

"Iran is well aware that any direct disruption to global oil flows through the Strait would likely trigger a significant military and economic response, possibly escalating the conflict beyond its control," she added.

Would the US be affected by a blockade?

The US is an energy giant and has become a net energy exporter since 2019, so it's less prone to physical supply shock from a blockade of the Hormuz.

However, the US could still be hit by the fallout from worsening global economic conditions.

"Any negative impact would be through deteriorating financial conditions or through higher for longer rates as the Fed has another reason to delay cuts," Deutsche Bank analysts said in a Monday note.

What about other countries?

Asian countries would be the most affected by a blockade of the Hormuz, said Priyanka Sachdeva, a senior analyst at brokerage Phillip Nova.

In 2024, over 80% of crude oil, condensates, and LNG that moved through the Hormuz headed to Asia, according to the EIA.

"Asia, which consumes the lion's share of Middle Eastern oil, would be most vulnerable, with India, Japan, South Korea, and China facing logistical uncertainties and costlier re-routing," said Sachdeva.

In 2023, a third of the oil that passed through the Hormuz headed to China, Bloomberg calculated.

South European countries dependent on Gulf oil could also face higher import costs, although Saudi Arabia and the UAE can reroute significant volumes of such exports via pipelines and via a pipeline and the UAE port of Fujairah.

What would a closure mean for gas prices and inflation?

Energy is a key input cost, so any gains in oil prices are likely to drive up inflation broadly.

The US's strike on Iran sent oil futures up to a five-month high late on Sunday. Oil prices are now up about 10% since Israel's strikes on Iran in June.

These developments are taking place amid the summer driving season, when US gas demand peaks. Should the gains in oil prices be sustained, pump prices are likely to rise in the weeks ahead.

According to the EIA, the price of gas typically rises by 2.4 cents per gallon when crude oil prices rise by $1. This translates into a gain of about 20 cents per gallon at current levels for oil futures.