The oil market remains on edge with the conflict between Israel and Iran entering its sixth day. Prices have rallied around 10% since Israel started its attack on Iran last week and are now close to a five-month high after US President Trump met with his national security team on Tuesday to discuss the escalating conflict, sparking speculation that the US could be preparing to join the attack.
The biggest fear for the oil market is the shutdown of the Strait of Hormuz. This could impact oil flows from the Persian Gulf. Almost a third of global seaborne oil trade moves through this chokepoint. A significant disruption to these flows would be enough to push prices to $120/bbl. OPEC’s spare capacity would not help the market in this case, as most of it is located in the Persian Gulf. Under this scenario, we would need to see governments tap into their strategic petroleum reserves, although this would only be a temporary fix.
This scenario also has ramifications for the European gas market.
On Tuesday, Qatar asked LNG vessels to wait outside the Strait until they were ready to load amid the escalating tensions. Qatar is the third-largest exporter of LNG, making up around 20% of global trade. And all this supply must move through the Strait. The global LNG market is balanced now, but any disruptions would push it into deficit and increase competition between Asian and European buyers.