The critical issues related to Iran have transformed geopolitical risk into actual oil supply constraints, redefining global energy markets. These markets, in fact, represent the front line in the impact of the conflict in Iran on the markets. The geopolitical risk, widely anticipated, had already pushed crude prices higher in the weeks before the attacks. However, the sharp slowdown of physical flows through the Strait of Hormuz has introduced a new and more acute supply risk. Iran produces about 3-3.5 million barrels of oil per day, exporting most of it to China at discounted prices. Given OPEC+’s limited remaining spare capacity, any prolonged disruption would be difficult to offset. The latest production increase announced by OPEC is marginal compared to the scale of the potential disruption; therefore, if barrels cannot pass through the Strait, the declared increases will offer little real relief. The key question for markets is no longer whether oil will react, but how long the physical supply disruptions will persist.
The Strait of Hormuz: a bottleneck under pressure
Maritime transport through the Strait of Hormuz has been effectively paralyzed since early March. Apart from Iranian vessels, there have been very few confirmed crossings of other tankers, as shipowners have canceled transits and insurers have withdrawn coverage following attacks on multiple ships. This dynamic alone is sufficient to create a significant geopolitical risk premium in oil prices. In response, the White House has stated it will support insurance coverage and may provide U.S. vessels to escort tankers through the Strait. However, since U.S. naval assets in the region will likely be stretched by ongoing operations, it is unclear how quickly naval escorts can be deployed, and in this context, timing is critical. In fact, if shipping disruptions persist, regional storage constraints will become tight, forcing producers to shut in supply regardless of demand.
Production disruptions are no longer theoretical
The consequences of transit constraints are already visible. Iraq has reduced oil production by about 1.5 million barrels per day since March 3, while Kuwait and the United Arab Emirates are cutting production to manage storage requirements. If the Strait remains closed, further disruptions will become significant as storage capacity runs out. The Kingdom of Saudi Arabia exports about 7.2 million barrels of oil per day through the Strait but also has a 5 million barrels per day pipeline to the Red Sea. Reportedly, Saudi producers are asking customers to pick up barrels from western ports. Even so, these routes are not without risks, highlighting how alternative logistical solutions also pose security challenges.
U.S. refiners emerge as short-term beneficiaries
Normally, nearly 4 million barrels per day of refined products transit through the Strait. However, refinery output has already been impacted, tightening global refined product balances. Several Middle Eastern oil refineries were attacked during the week, while Kuwait has reportedly already reduced refining activity due to lack of remaining storage capacity and is expected to make further cuts in the coming days. Asian refineries are also cutting production in response to lower crude supply. Meanwhile, diesel and jet fuel prices surged this week, reflecting tighter product availability. In Europe, natural gas prices rose, pushing up global refining costs, while in the U.S., natural gas prices increased only moderately, improving cost competitiveness for U.S. operators. These factors have led to significant outperformance of U.S. refining sector stocks, as markets reassess regional winners and losers in light of the ongoing disruption.
The liquefied natural gas (LNG) shock complicates the energy picture
Oil is not the only factor at play. International natural gas prices rose after QatarEnergy halted LNG production (about 20% of global supply), declaring force majeure following an attack. The production shutdown was inevitable, given the lack of alternative market routes and limited on-site storage capacity typical of LNG plants, considering the high cost of storage. Due to the plant’s size, it could take weeks to restart after navigation routes reopen and even longer to return to full production capacity. This situation tightens global gas balances and raises energy costs for import-dependent regions. U.S. LNG exporters benefit from a wider transatlantic price spread, while companies directly exposed to Qatar’s LNG production face short-term cash flow headwinds. Overall, energy insecurity is strengthening inflationary pressures outside the U.S.
Oil services disruptions outweigh price support
Oil services companies have experienced negative performance despite rising oil prices. The Middle East is a key region for global oil services, but operations are increasingly compromised. With flights canceled, embassies closed, and many workers forced to shelter at home, offshore activity has effectively been suspended in parts of the region. Well shutdowns and operational disruptions translate into a slowdown in oil services activity, even as prices rise.
Conclusions
The conflict in Iran has transformed abstract geopolitical risk into a concrete supply disruption in oil markets. With maritime transport through the Strait of Hormuz nearly halted, storage constraints are forcing shutdowns, refining margins are widening unevenly, and energy prices are retransmitting inflation risk into the global economy. The key question for markets is no longer whether oil will react, but how long physical disruptions will last and whether energy shocks will begin to generate broader financial tightening.
