Oil Prices Surge on Iran Conflict and Strait of Hormuz Risk

The recent Iran conflict and Strait of Hormuz risk have caused oil prices to rebound. This phenomenon is not driven by traditional supply-demand fundamentals, but rather by geopolitical events that can rapidly shift market sentiment. Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, notes that tensions involving Iran, Gulf producers, or the Strait of Hormuz can restrict exports and delay shipping, leading to higher freight costs.

The Strait of Hormuz is a critical maritime passage through which approximately 20% of global oil supply transits. Current throughput is around 50% of pre-conflict levels, with pipeline re-routing filling part of the gap. However, these alternative flows are becoming increasingly vulnerable as the conflict persists.

Partial disruption can produce disproportionate price reactions due to several mechanisms, including elevated war-risk insurance premiums, vessel re-routing, and buyers securing supply preemptively. Even if crude production volumes remain unchanged, the cost of physically moving oil from the Persian Gulf to global end markets rises sharply during conflict periods, functioning as an invisible supply reduction.