Saudi Arabia’s state oil company, Aramco, has raised alarms about severe risks to global oil markets if the conflict between the U.S. and Iran disrupts shipping through the Strait of Hormuz. This vital waterway is crucial for oil transport, carrying about 20% of the world’s oil. Despite this, Aramco estimates it can still supply around 70% of its usual production, although CEO Amin Nasser cautions that prolonged disruptions could harm the global economy.
Since U.S. airstrikes on Iran, oil shipments have seen significant blockages, halting the departure of roughly 20 million barrels a day. Yet, oil prices dropped on Tuesday after Donald Trump mentioned the potential for a quick resolution. The price of Brent crude fell to about $85 per barrel, down from recent highs of $119, which were raised by concerns similar to those during Russia’s invasion of Ukraine.
In response to the crisis, Aramco plans to boost shipments through its east-west pipeline to the Red Sea. This pipeline can handle up to 7 million barrels daily, ensuring that at least some crude reaches global markets despite the disruptions in the Gulf.
Historically, this isn’t the first time the Strait of Hormuz has faced threats. During past geopolitical tensions, such as the 1979 Iranian Revolution, similar fears about oil supply disruptions spurred significant market reactions. The current situation mirrors those times, highlighting how quickly oil supply can be jeopardized by geopolitical issues.
In the past week, market responses have varied. While Aramco expresses concern, European markets rallied, with the FTSE 100 gaining 1.6% and Germany’s DAX climbing 2.4%. The International Energy Agency (IEA), which was established during the oil crisis of the 1970s, is prepared with reserves, emphasizing the importance of having emergency stockpiles. Member countries of the IEA collectively hold over 1.2 billion barrels in reserves, while non-member China might have around 1.4 billion.
Looking ahead, G7 leaders have urged energy regulators to consider scenarios for releasing emergency oil reserves to stabilize prices. This could be a key step to prevent long-term damage to the global economy and keep oil prices manageable. The situation remains fluid, with traders watching closely as geopolitical tensions continue to unfold.
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