As Iran launched missiles at a US military base in Qatar in retaliation to American airstrikes at its nuclear facilities, oil prices tumbled. With West Asia on edge amid the Israel-Iran conflagration and the US joining in, the fact that oil prices slipped after Iran fired missiles at Qatar could seem counterintuitive at first, given that it would appear that the conflict was escalating further. Oil traders, however, saw it differently. To them, Iran’s Monday evening strikes accompanied by a de-escalatory tone were signals that Tehran was not going to target oil shipments or attempt a blockade of the critical chokepoint—the Strait of Hormuz—and would limit its response to seemingly symbolic strikes.
The traders, it now appears, were right in their assessment. Overnight, US President Donald Trump announced a ceasefire between Israel and Iran. Although the two countries have not officially acknowledged that an understanding has been reached, there are clear indications that military action is likely to be suspended, at least for the time being. Iran’s foreign minister Seyed Abbas Araghchi said that there was no agreement on any ceasefire, but if Israel stopped attacking Iran, then the latter had no intention to continue with its attacks.
Oil prices started slipping after Iran’s volley of missiles at the US base in Qatar, giving up all the gains of the past couple of weeks. Trump’s announcement of an Israel-Iran “ceasefire” further exacerbated the fall. Brent is currently hovering around $68 per barrel. Over the course of the nearly two-week conflict between Israel and Iran, oil prices were volatile, with Brent rising from around $69 per barrel to $81, given the presence of threat to West Asian oil export infrastructure and flows from the region. War risk premiums on shipping surged over fears that oil tankers could become targets, or even collateral damage.
But oil prices still did not really shoot through the roof, despite Tehran’s warnings that it could shut the Strait of Hormuz. In fact, the Iranian parliament on Sunday recommended the closure of the strait, which is critical for global energy flows, but the oil prices did not really shoot up when markets opened the next day. It was clear that energy markets, while concerned and watchful, were not really buying into Iran’s threats of blocking the Strait of Hormuz. For energy industry insiders and analysts, it was always improbable, a highly distant possibility at best.
Critical chokepoint for global energy flows
The Strait of Hormuz is a critical and narrow waterway between Iran and Oman, and connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. The US Energy Information Administration (EIA) calls it the “world’s most important oil transit chokepoint”, with around one-fifth of global liquid petroleum fuel consumption and global liquefied natural gas (LNG) trade transiting the strait.
The strait is critical for India’s energy security as well. According to tanker data, over 45 per cent of crude oil imported by Indian refiners in May was likely to have been transported from various oil producing countries in West Asia via the Strait of Hormuz. The importance of the chokepoint for India’s energy supply and security cannot be understated as the country is the world’s third-largest consumer of crude oil and depends on imports to meet over 88 per cent of its requirement.
The strait’s blockade, if it actually did happen, would have sent energy prices soaring, with predictions of oil prices in triple-digits, up to $130 per barrel, being widely talked about. Such price levels would have hurt the global economy, with additional pain points for energy import-dependent countries like India. Given the fragile peace now in place in the region, that fear has abated to a great extent, at least for the time being.
Why Hormuz closure always seemed improbable
Iran has in the past threatened to close the strait on multiple occasions, but has never actually done it, even during some of its worst wars. A large number of energy sector experts and analysts, while viewing Iran’s repeated threats of the strait’s closure with concern, maintained that the possibility was extremely low, primarily because such a move would impose a heavy cost on Iran, which would outweigh any benefit the country may get.
“First foremost, such a blockade would disproportionately harm China, which sources 47 per cent of its seaborne crude from the Middle East Gulf, including Iranian volumes. Iran’s ability to maintain its sole major oil customer would be directly jeopardised. Additionally, Tehran has made deliberate efforts over the past two years to rebuild ties with key regional actors, including Saudi Arabia and the UAE, both of which rely heavily on the Strait for exports and have publicly condemned Israel’s actions. Sabotaging their flows would risk unraveling those diplomatic gains,” commodity market analytics firm Kpler had said on Thursday (June 19).
In fact, US Secretary of State Marco Rubio said in an interview with Fox News that China should prevent Iran from attempting the strait’s closure, as China is the key buyer of Iranian oil and seen as having a close relationship with Iran. He added that while the US retained options to deal with the strait’s closure, “other countries should be looking at that as well”. He also termed the strait’s closure as “economic suicide” for Tehran.
Iran remains structurally reliant on the Strait of Hormuz. While it has an oil export terminal located outside the Persian Gulf, its effective capacity is only a fraction of Iran’s oil export volumes that cannot bypass the strait.
Additionally, Iran would have certainly faced international military retaliation if it went ahead to close the Strait of Hormuz or targeted the transiting oil shipments.
“Any Iranian naval build-up would be detectable in advance, likely triggering a preemptive US and allied response. At most, isolated sabotage efforts could disrupt flows for 24–48 hours, the estimated time required for US forces to neutralise Iran’s conventional naval assets… while the rhetoric may generate headlines, the fundamentals argue strongly against action,” Kpler’s June 19 note said.
Also, the strait’s closure would have infringed upon Oman’s territorial waters, souring Iran’s relationship with its neighbor, which would have been counterproductive for a country that doesn’t exactly have a lot of friends and allies in its neighbourhood, analysts pointed out. Iran depends on Oman for back-channel diplomacy with the US, and alienating Muscat could have significantly constrained Iran’s diplomatic options.
Oil prices started slipping after Iran’s volley of missiles at the US base in Qatar, giving up all the gains of the past couple of weeks. (Source: File) 
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