Iran suspends Hormuz passage, cutting off 20% of global oil

Iran's "Persian Gulf Strait Authority" declared Hormuz closed to normal passage on July 31, citing continued US military aggression in surrounding waters, a move that threatens roughly 20 percent of global oil and LNG trade.

"The region's energy sector appears weaker and more vulnerable than at any point since the war began," said Ron Bousso, energy columnist at Reuters, in a July 30 analysis.

Combined exports from the Gulf and Saudi Arabia's west coast have already slipped to around 6.2 million barrels per day this week, less than half the wartime peak of 13.4 million bpd hit in late June and far below the more than 20 million bpd that typically left the region before the conflict, according to data analytics firm Kpler. The announcement follows the unraveling of the US-Iran interim ceasefire deal on June 17 and renewed US strikes against Iranian targets this week after Tehran and allied militias targeted tankers and two major refineries in Kuwait and Saudi Arabia.

The formal closure raises the stakes for global energy markets that have been operating under an effective shutdown for months. India's Mangalore Refinery has already issued a crude purchase tender explicitly asking suppliers to avoid the Red Sea and the Strait of Hormuz, while Asian and European LNG importers are pressing Qatar and the UAE for lower prices and stronger supply guarantees. If the closure persists, crude prices could spike well beyond current levels, triggering safe-haven flows into gold and US Treasuries and a broad sell-off in global equities.

Exports Already Halved

The suspension accelerates a decline that has been building since the US and Israel launched strikes against Iran more than five months ago. Gulf producers have been forced to reroute shipments through the Red Sea, but Yemen's Iran-backed Houthi militia declared an embargo on Saudi exports last week, complicating that alternative corridor. Attacks on tankers and energy infrastructure have forced two major refineries in Kuwait and Saudi Arabia to shut down.

The last comparable disruption came during the Iran-Iraq War in the 1980s, when the "Tanker War" led to US naval escorts of reflagged Kuwaiti tankers and a sustained period of elevated oil prices and war-risk insurance premiums. That conflict eventually ended with a ceasefire, but the current standoff has no obvious diplomatic off-ramp. The US has so far failed to eliminate Tehran's ability to disrupt shipping with air strikes, while President Donald Trump appears reluctant to embark on a deeper regional war.

Buyers Rethink Gulf Dependence

The psychological damage may outlast the physical disruption. For decades, Gulf energy supplies commanded a reliability premium from Asian buyers. The war has demonstrated that Iran can disrupt the strait using relatively cheap drones and missiles, and even if shipping resumes, the threat will persist. Gulf producers may be forced to offer discounts to retain customers, and importers are already seeking more bespoke, direct supply deals outside the liquid spot market.

Oman presented Tehran with a Gulf-backed proposal under which Iran would help administer the strait and collect voluntary fees from vessels using the route. Iran rejected the proposal, insisting that the entire inbound shipping channel and part of the outbound route should fall under its control, according to an Iranian official. Washington has repeatedly rejected any suggestion that ships should pay tolls to transit the strait.

The immediate question is whether the US will respond militarily to enforce freedom of navigation or whether diplomatic pressure will force a compromise. With Tehran demanding control over the strait and Washington refusing to legitimize any Iranian authority over the waterway, the standoff has no obvious near-term resolution. Energy markets are pricing in a prolonged period of elevated risk, with higher insurance premiums and shipping costs becoming the new cost of doing business in the Gulf. For Asian importers that depend on Gulf crude for a significant share of their refining feedstock, the cost of rerouting and higher insurance could translate directly into higher fuel prices for consumers.

This article is for informational purposes only and does not constitute investment advice.