Wood Mackenzie Report
Closure of the Strait of Hormuz is seen as unlikely, but uncertainty is high
Just after midnight on Friday night, seven B-2 stealth bombers took off from Whiteman Air Force Base in Missouri, heading for Iran. Supported by about 120 other aircraft, including tankers for in-flight refuelling, they dropped 14 30,000-pound Massive Ordnance Penetrator (MOP) “bunker-buster” bombs on two Iranian nuclear facilities, at Fordow and Natanz, before returning safely to base. Another nuclear site, at Isfahan, was also hit by US submarine-launched cruise missiles.
The US attacks, coming after nine days of conflict between Israel and Iran, represent an escalation of hostilities and could have significant implications for global energy markets. About 15% of the world’s oil supply, in crude and products, and 20% of the world’s LNG supply pass through the Strait of Hormuz, at the mouth of the Gulf. Some Iranian politicians have threatened to block the Strait in retaliation for the US attacks.
The initial reaction in oil prices when markets opened on Monday morning in Asia suggested that the risk of such disruption is seen as quite low. Brent crude was priced at about US$79 a barrel in early trading, up less than US$2 a barrel from Friday’s close. On Monday, tanker traffic still appeared to be moving as normal through the Strait. By Monday evening in the US, Brent crude was down to about US$70.50 a barrel, well below its level last Friday.
However, a number of uncertainties could still affect the ultimate impact on energy markets.
The US has attempted to dissuade Iran from retaliation. President Donald Trump, in a statement on his Truth Social platform soon after the attacks, said “now is the time for peace”. Vice-President JD Vance argued in a TV interview that the US was “not at war with Iran, we’re at war with Iran’s nuclear programme”.
Administration officials said any strikes from Iran would lead to further US attacks. President Trump declared: “There will be either peace or there will be tragedy for Iran far greater than we have witnessed over the last eight days.”
Iranian officials condemned the attacks and threatened retaliation. Abbas Araghchi, the foreign minister, said: “The war-mongering and lawless administration in Washington is solely and fully responsible for the dangerous consequences and far-reaching implications of its act of aggression.”
He added that Iran “reserves all options to defend its security interests and people”.
Iran’s parliament voted to close the Strait of Hormuz, but it is not the key decision-making body. A move to blockade the Strait or attack shipping would have to come from the country’s Supreme National Security Council.
But Israel’s apparently highly effective attacks on Iranian military installations have raised questions over what retaliation might be possible.
It remains unclear exactly how effective the US bombing has been. Fordow, the nuclear site that was the target for 12 of the 14 bombs dropped, is buried in a mountain, with its main halls estimated to be up to 300 feet deep.
General Dan Caine, chairman of the US Joint Chiefs of Staff, said an initial battle damage assessment indicates that “all three sites sustained extremely severe damage and destruction”.
The International Atomic Energy Agency (IAEA) said it had been informed by the Iranian authorities that there was no increase in off-site radiation levels around the three sites. But it warned that the presence of enriched uranium meant that bomb and missile strikes “may cause radioactive and chemical contamination”.
Rafael Mariano Grossi, the IAEA’s director general, called an emergency meeting of the agency’s board of governors on Monday. He urged all sides to avoid attacks on nuclear installations and reiterated his call for a diplomatic solution.
The ultimate goals for the US are also unclear. Although administration officials yesterday disavowed any intent to overthrow Iran’s government, President Trump left open the possibility of regime change.
He posted on Truth Social on Sunday: “It’s not politically correct to use the term, “Regime Change,” but if the current Iranian Regime is unable to MAKE IRAN GREAT AGAIN, why wouldn’t there be a Regime change???”
Until very recently, direct US action to attack Iran was not seen as imminent. When Israel began its air, missile and drone strikes on Iranian installations and leaders on 12 June, Secretary of State Marco Rubio put out a statement distancing the US from the attacks.
Less than two weeks later, the US has joined the conflict. In this volatile situation, events could again move rapidly in unexpected directions.
The Wood Mackenzie view
Oil prices have risen this month to reflect an additional risk premium, not because of any impact on physical flows. Oil and LNG are still flowing freely through the Strait of Hormuz. If Iran did move to block or disrupt that traffic, the impact would be much larger than the effects that we have seen so far.
“We know that the global energy system does not work with any long-term closure of the Strait of Hormuz,” says Alan Gelder, Wood Mackenzie’s senior vice president for Refining, Chemicals and Oil Markets. “The supply loss is too large, and consuming countries’ stocks can only last so long while the alternative sources of supply are not large enough.”
If shipping were disrupted or the Strait closed, the impact on oil prices would be severe, with Brent crude moving to US$90 to US$100/bbl, or higher.
US production could eventually help fill part of the shortfall in supply, but it would take time. With WTI crude at around US$60/bbl in May, drilling activity in the US Lower 48 states was declining. Fraser McKay, Wood Mackenzie’s head of Upstream Analysis, says most larger operators won’t decide to ramp up activity substantially until they are confident that prices will stay high for quite some time.
He adds: “Some companies will choose to stick with original plans and maybe tweak activity up slightly instead of cutting back, which was what they were gearing up to do with Brent in the US$60s. The US response could eventually become significant if markets remain tight, but this would do little to offset any near-term disruption.”
The impact on LNG could be even greater, says Massimo Di Odoardo, Wood Mackenzie’s vice president of Gas and LNG Research. “The LNG market is still tight and lacks supply,” he says. “Europe is building stocks and there is no LNG supply upside if prices go higher.”
LNG prices were trading at US$12/mmbtu before the Israeli attacks. That was at parity with oil on an energy-equivalent basis, and quite a high price for the summer months. The previous 10-year annual average was about $7.5/mmbtu.
The summer heat is pushing demand up in North Asia and Europe, and the EU has recently reiterated its intention to get rid of Russian gas imports, including LNG, over the next two years. LNG prices have increased 20% since Israel’s first strike on 12 June, which is more than the increase in oil prices.
(Curtailments of Israeli gas supplies to Egypt have been an additional factor driving prices higher. By contrast, oil supply disruption has not yet materialised.)
Closing the Strait of Hormuz would hurt Iran’s economy by shutting off most of its oil exports, and would be expected to provoke a strong response from the US. For those reasons, we see such a move as unlikely. But just because a course of action is irrational does not mean that it is impossible.
The threat of attacks on shipping or other disruption to traffic in the Strait should be taken seriously, even if it is not the most likely outcome