From Risk Premium to Real Disruption: Iran, Hormuz, and Energy Prices

The Strait of Hormuz is virtually closed. Tanker traffic has slowed sharply, vessels are pooling on both sides, and war risk insurance has become the binding constraint for physical trade. This is where a geopolitical story meets a market mechanics story.

Oil has repriced quickly. Both, Brent and West Texas Intermediate (WTI) were  trading on Friday in the $90s per barrel, over $20 more than they were at just a week ago.  The longer the disruption lasts, the higher prices will rise as supply becomes trapped behind a chokepoint or inaccessible due to infrastructure failures and the system loses flexibility.

Markets had been paying for insurance for weeks. Brent was already higher since January on escalating U.S.-Iran risk, even without visible supply losses. That pricing assumed either a low probability of severe disruption or that any disruption would be short lived. Those were assumptions. They are now being tested.

The chokepoint is the shock

Hormuz handles about 20% of oil and petroleum product flows and is a critical route for Gulf exporters and Liquified Natural Gas (LNG) cargoes. The Strait has not been “officially closed”; no official blockade has been imposed. Instead, due to escalation of risk, insurers withdrew cover and shipowners paused. The Strait became functionally impassable, lifting freight and delivered prices.

Some bypass routes exist (Figure1), but they are small relative to Hormuz. Energy Information Agency (EIA) estimates that pipelines in Saudi Arabia and the UAE could provide about 2.6 million barrels per day of capacity that can bypass the Strait. That helps at the margin. It does not replace a chokepoint that normally moves about 20 million barrels per day.

Figure 1.

Image Source: EIA

In this context, the OPEC+ announcements of modest 206,000 barrels per day production increase starting in April does not solve the problem. Not only is the increase small in absolute terms, more than half of the increase is assigned to countries, which face the Strait of Hormuz chokepoint (Figure 2).

Figure 2.

Figure Source: OPEC

To alleviate the situation, the U.S. announced that the U.S. Development Finance Corporation will provide political risk insurance and guarantees for maritime trade through the Gulf, while the U.S. Navy prepares to escort tankers. This seemed to have calmed oil prices at first, but risk is so high that insurers have kept the premiums high and prices rose again.

Even if the initial disruption is “only” a shipping crisis, the next risk layer is infrastructure. Once terminals, refineries, and export hubs are in the line of fire, the market shifts from temporary logistics stress to structural supply impairment. And we have already witnessed the first signs of trouble, including Iranian drone attacks on Qatari LNG operations in Ras Laffan and Mesaieed Industrial City, Saudi refining complex Ras Tanura, Oman’s ports of Duqm and Salalah, and UEA’s Fujairah and Mussafah oil terminals. Attacks on those facilities underscore that Gulf energy infrastructure is part of the retaliation calculus. Depending on the extent of the damage, the related outages may take longer than the conflict, putting additional strain on the market.

Short-term calculus: the oil market

At least for now, however, the response from the oil markets is quite measured, perhaps somewhat surprisingly given the extent of the disturbance. This is likely based on two elements.

First, there is persisting underlying expectation that the conflict will be rather short-lived.

Second, the markets have been well supplied, if not oversupplied, ahead of the conflict, with substantial amounts of oil accumulated in either strategic or commercial stockpiles. Indeed, early this year oil prices were falling due to what was perceived as oversupply. The oversupply provides a cushion of around 1.5–2 million bpd, about the volume of Iranian oil exports that has been lost.

This recent abundance and resulting low prices allowed many countries to stock up on oil.

This includes the U.S. Strategic Petroleum Reserve (SPR), which currently sits at about 60% of its capacity, for a total of 415 million barrels, and can pump at a maximum rate of 4.4 million barrels per day for 90 days (after that, we would see a decrease as the drawdown rate declines as storage is emptied). The SPR could sustain a 1 million bpd rate for nearly a year and a half and could deliver to the market as soon as 13 days after a decision to release volumes, although no such plans currently exist.

The International Energy Agency, created following the 1973-1974 oil crisis to prevent severe oil market disruptions, is also holding off on any rushed decisions to release the oil its 31 members are obligated to keep in storage under the IEA mandate, either via industry stocks, government stocks, or agency stocks (or a combination of those). If released, those supplies should be enough to cover 90 days of each of those countries’ imports. The U.S., the U.K., the EU, Japan, and Canada have been reported to hold about 2.8 billion barrels in oil stocks.

Just as, if not more important is that China, world’s number one oil importer, has built one of the largest non-IEA strategic reserves in recent years. Currently, these are estimated to be at about 400 million barrels, or 1.1 million bpd, following what can only be described as a shopping spree. Indeed, China’s oil purchases hit a record high in 2025 (11.55 million bpd) as the country took advantage of discounted sanctioned oil from Iran, Russia, and Venezuela.

At the same time, however, China receives about half of its oil imports from the Gulf. And while the reserves are extremely useful, the solution is only short-term. To extend the ability to support own economy, China has now ordered its largest refiners to suspend exports of oil products except for jet fuel and bunker fuel in bonded storage. Supplies to Hong Kong and Macau were also allowed.

Less conspicuous than strategic oil reserves, but also important in the short term, are the floating oil reserves stored on tankers. In fact, Gulf countries accelerated oil exports in anticipation of conflict with Iran. In February, Saudi Arabia’s shipments averaged about 7.3 million bpd, 0.4 million bpd above January levels and the highest since April 2023. Also, the UAE and Iraq increased their exports. Iran increased its loadings in February as well, effectively tripling its January exports (approximately 3 million bpd). As oil exports from Iran average about 1.5–1.6 million a day in February, this indicates Iran’s attempt to move some of its production to floating storage. In general, floating storage exploded in Asia at the end of 2025 on sanctioned oil flows from Iran, Venezuela, and Russia. This will help in the short term, as this region has been the primary destination for oil from the Strait of Hormuz.

Short term calculus: natural gas

The oil market has buffers, at least in the short term. The LNG market has fewer.

The effective closure of the Strait of Hormuz and infrastructure attacks have eliminated 20% of global LNG supply. The latter may be more problematic as Iranian drones have damaged Ras Laffan Industrial City, world’s largest LNG export facility and Qatar stopped production declaring force majeure. It will take around a month to restart the facilities, and this is only after any damage from the drone attack has been repaired. At this point, we don’t know the extent of the damage and how long it would take to repair it.

The sudden disappearance of such high volumes, and the possibility of a maritime blockade is much more problematic for global markets as there is no sufficient spare capacity to replace it. No strategic reserves like those mandated by the IEA, for example, exist. The European gas storage is at low point after a cold and long winter. The largest LNG exporter, the U.S. is already producing and exporting at near-to capacity levels with any additional exports limited by the capacity of the current infrastructure.

As Qatar’s LNG customers, are overwhelmingly located in Asia, with China leading the pack as it constitutes about ¼ of Qatar’s total LNG exports (Figure 3).

Figure 3.

Data Source: Trading Economics

As a result, the region has been pulling most cargos from the Atlantic paying a hefty premium over Europe. The Asian premium has been reported to reach approximately $5 per million British thermal units (MMBtu). Prices in both regions rose by around 60%.

However, the Asian premium may not be long-lived. A cold winter and low wind output contributed to uncomfortably low gas storage levels in the EU. As Figure 5 shows, the storage levels have been nearly at a 5-year minimum and nearing the historic low in 2022 that followed Russian aggression in Ukraine and Russia’s prior actions that emptied European storage to record low levels. (Figure 4)

Figure 4.

Data Source: Breugel

Even as winter ends, EU policy keeps demand in the system. The EU requires gas storage to reach 90%, with flexibility to meet the target between October 1 and December 1. That means European buyers remain in the market even when prices rise, keeping global LNG prices higher outside peak heating season.

In the long-term…

This is what we are facing now. But if the crisis continues into the summer or fall, we will need to consider longer-term consequences. Releases from strategic reserves can provide some cushion. But we are all unlikely to avoid higher energy prices, particularly when it comes to oil products given the liquidity of the oil market. Large Asian importers, such as China and India are also likely to look toward Russia for both oil and gas, counting on discount on the sanctioned cargos. Even so they will be paying much more than before. China is likely to bring in more Russian LNG and use coal to substitute where possible for oil and gas. Indeed, Russia stands to benefit from the current crisis. The longer the crisis lasts, the better from Russia’s perspective. To alleviate some of the market constraints, the U.S. has already issued a temporary waiver on sanctioned Russian oil going to India for the next 30 days, and Hungary’s leader, Viktor Orban, vows to reopen the Russian oil pipeline. Also, China is more likely to bring in more Russian oil now that its access to both Middle Eastern and Venezuelan oil has been constrained. The Russian natural gas industry may benefit as well, in the short run and in the long run. China is likely to pursue higher volumes of Russian gas, as Qatari gas will be perceived as riskier than ever before. In the new five-year plan, China already committed to advancing early work on the Power of Siberia 2 pipeline from Russia, a move that Russia has pursued for over a decade now but that has been seen as unlikely by market and policy observers. The country will also be looking into bringing in more Russian LNG, a move that will be welcomed by Arctic LNG operations under sanctions.

With few alternatives, Europe is likely to face another gas crisis raising prices for all LNG importers. As such Qatari customers in Asia who lost contracted volumes, will be priced out from the spot market and face shortages of energy if they cannot substitute with coal.  

The U.S. oil and gas sector, known for its ability to respond relatively quickly to price signals is likely to increase production. This could moderate global prices of oil to an extent. And next wave of U.S. LNG will provide small respite for global LNG markets as 2026 should see increase in U.S. LNG exports from 17 to over 19 billion cubic feet per day (Bcf/d).

Conclusion

This crisis is not only about what is produced. It is about what can be moved, insured, and delivered. As long as Hormuz remains impaired, the downside for prices is limited and volatility remains elevated. A partial reopening reduces the logistics premium. A prolonged disruption turns into forced shut ins and strategic reserve decisions.

But even if the disruption is short lived, it indicates to the market that the energy flows coming via the Strait of Hormuz and from the region are not as secure as they seemed just a week ago. In this context, U.S. growing supply and exports of oil and gas increasingly become geopolitical insurance, not just commercial supply. Coming from less geopolitically charged region with private companies rather than governments responsible for contracts and delivery, those exports will be sought more than ever. Canada will be another sought after exporting country. This includes its newly commenced LNG exports as well as its oil.

Featured Image: STRAIT OF HORMUZ (Feb. 14, 2012) An MH-60R Sea Hawk helicopter assigned to the Saberhawks of Helicopter Maritime Strike Squadron (HSM) 77, embarked aboard the Nimitz-class aircraft carrier USS Abraham Lincoln (CVN 72), flies patrol as the ship transits the Strait of Hormuz. Abraham Lincoln is deployed to the U.S. 5th Fleet area of responsibility conducting maritime security operations, theater security cooperation efforts and support missions as part of Operation Enduring Freedom. (U.S. Navy photo by Cmdr. Daniel J. Walford/Released)Image Credit: Official Navy Page from United States of AmericaDANIEL_WALFORD/U.S. Navy, Public domain, via Wikimedia Commons