The narrow waters of the Strait of Hormuz, a vital artery of the global energy system have become the epicentre of the latest shock to oil markets as the US-Israeli war on Iran escalates. Tankers are anchored, refineries are struggling to ship fuel, and some of the world’s biggest oil producers are cutting output as storage tanks fill up.The conflict has effectively blocked the strategic shipping route. With vessels avoiding the corridor due to security risks and energy infrastructure under attack, with several reports warning that the disruption could become one of the most serious supply shocks in decades.
As the crisis ripples through global markets, governments and energy agencies are scrambling to contain the fallout from releasing emergency oil reserves to imposing price caps and restricting exports, while businesses and consumers brace for rising energy costs.
The Strait of Hormuz
The Strait of Hormuz, located between Iran and Oman, is one of the most strategically important waterways in the world.The narrow shipping corridor normally carries about one-fifth of global oil and liquefied natural gas shipments. Tankers transport crude from major Gulf producers to markets across Asia, Europe and North America.But the escalation of the US–Iran conflict 2026 has effectively shut the route. Since the war began on February 28 with joint strikes by the United States and Israel on Iranian targets, tanker movement through the strait has slowed dramatically. Many vessels are avoiding the corridor entirely due to security risks, with several tankers already attacked since the conflict began. Hundreds of ships are currently anchored on both sides of the waterway as shipping companies and oil traders wait for signs that navigation through the strait may resume safely.
Strait of Hormuz
Oil producers forced to cut output
The disruption has quickly affected production across the Gulf.Top Middle East producers, including Saudi Arabia, Iraq and Kuwait have begun reducing output at their oilfields.With tankers unable to load crude for export, companies have been forced to divert oil into storage. However, storage facilities across the region are nearing capacity after nearly 10 days of shipping disruptions.Once storage tanks fill up, producers have little choice but to slow or halt production. This scenario threatens to tighten global oil supply sharply if exports do not resume soon.
Oil infrastructure and refineries under attack
The war has also damaged key energy infrastructure across the Gulf region. Some refineries have been directly hit during the conflict.The 380,000-barrel-per-day Sitra refinery operated by Bapco Energies in Bahrain was struck and declared force majeure earlier this week.Meanwhile, Saudi Aramco had shut its largest refinery at Ras Tanura which also hosts the kingdom’s biggest marine export terminal after a drone strike from Tehran.These disruptions have further limited the region’s ability to process and export fuel products.Kuwait’s massive Al Zour Refinery, which processes about 615,000 barrels per day and supplies jet fuel to Europe and Africa, has also been affected as shipping routes remain blocked. Even if hostilities ease soon, repairing damaged infrastructure and restarting production could take weeks.Tanker traffic through the strait has stopped, insurance costs have gone up, and big shipping companies have stopped crossing. Over 400 oil and product tankers are sitting still in the Gulf, and some vessel tracking shows that flows through Hormuz are much lower than usual.
Emergency oil reserves considered
With global supplies tightening rapidly, the International Energy Agency is preparing an emergency response.The agency is expected to recommend releasing around 400 million barrels of oil from strategic reserves, the largest such move in its history. Emergency stockpiles are designed to cushion the global economy from sudden supply shocks.However, the spare production capacity may not be enough to fully offset the disruption if the Strait of Hormuz remains closed.Until shipping resumes, refineries around the world will likely rely on existing inventories to continue producing fuel for transport, industry and power generation.
Oil and gas prices surge
Energy prices have already surged sharply since the conflict began. Oil briefly climbed to about $119 a barrel earlier this week the highest level since 2022, as traders reacted to the supply disruption. Although prices later eased slightly, analysts warn that prolonged disruption could drive crude significantly higher.If supply losses persist, prices may rise until higher energy costs reduce demand, a process economists often describe as “demand destruction.” The impact is not limited to crude oil. Prices for gasoline, diesel, jet fuel, natural gas, petrochemicals, fertilisers and electricity have all risen sharply since the war began, according to Reuters reports.Shipping costs have also surged as insurers and freight operators price in the risk of attacks on vessels passing through the Gulf.
Asia faces the biggest risk
Asian economies are considered the most vulnerable to supply disruptions from the Strait of Hormuz. Many countries across the region rely heavily on imports of crude oil, liquefied natural gas and refined fuel from the Middle East.Only the Strait of Malacca, between Malaysia and Indonesia, sees more tanker traffic than Hormuz. With the Gulf corridor disrupted, governments across Asia are scrambling to manage the impact.
China has asked refiners to halt fuel exports to secure domestic supply. South Korea has imposed price caps on fuel for the first time in three decades.Meanwhile, Bangladesh has shut universities temporarily in an effort to conserve electricity and fuel.
Limited alternatives to bypass Hormuz
Some Gulf producers have limited options to bypass the strait using pipelines.Saudi Arabia has been pumping crude through its East-West pipeline to the Red Sea port of Yanbu. The pipeline can transport up to 5 million barrels per day.However, Yanbu has rarely loaded more than 2.5 million barrels per day, limiting its ability to fully replace exports through Hormuz.
The United Arab Emirates also operates the Abu Dhabi Crude Oil Pipeline known as the “Habshan-Fujairah pipeline” which can carry about 1.5 million barrels per day from inland oilfields to the port of Fujairah on the Gulf of Oman.While these pipelines provide partial alternatives, they cannot fully replace the massive volumes that normally pass through the strait.Another sign of how messed up the market has become is that buyers are paying more for barrels that can load outside of Hormuz. The Wall Street Journal said that crude oil from Oman has gone up a lot compared to Dubai grades that are stuck on the wrong side of the chokepoint. Tankers are going to Yanbu and Fujairah instead. Petrobras says that Saudi Arabia is still keeping its promises by shipping through the Red Sea route, even though shipping costs have gone up a lot.
Rising costs for businesses and consumers
And as experts told Middle East Eye, the real squeeze may be more on refined products than on crude oil. Policymakers can point to crude oil still moving. But the economy as a whole depends on more than just oil prices. It also depends on several other factors.Higher fuel costs are pushing up inflation and increasing the cost of producing and transporting goods. Food prices are also rising as fertiliser and transportation costs climb.Farmers across the Northern Hemisphere, currently preparing for planting season, are facing higher input costs due to the spike in energy prices.Businesses across sectors from aviation to manufacturing are also seeing operating costs rise.
India among the vulnerable economies?
Among major economies, India is considered particularly vulnerable to an oil shock. The country imports nearly 90% of its crude oil and about half of its natural gas needs.More than 40% of India’s crude imports come from the Middle East, the region currently at the centre of the conflict.India’s oil reserves are estimated to cover only about 20 to 25 days of consumption. If high oil prices persist the country could face significant economic pressure. And a prolonged spike in oil prices could affect India’s growth, inflation and government finances.According to Reuters, economists said that an average crude price of $100 per barrel could widen India’s current account deficit to between 1.9% and 2.2% of GDP in the 2026-27 financial year.If oil prices rise to around $120 per barrel, the current account deficit could expand to roughly 3.1% of GDP.
Higher import costs have already pushed the rupee to record lows, forcing the central bank to sell dollars from its reserves to stabilise the currency.High oil prices could also increase government spending significantly. According to estimates by Mumbai-based Elara Securities, federal expenditure could rise by around 3.6 trillion rupees ($39 billion) next year if oil prices average $100 per barrel.India is targeting a fiscal deficit of 4.3% of GDP for the 2026-27 financial year. Maintaining that target while absorbing higher energy costs could force the government to cut spending in other areas such as infrastructure investment.
India’s economy is expected to grow more than 7% in the coming financial year. However, if oil prices remain close to $100 per barrel throughout the year, growth could slow to about 6.6% while inflation could rise to around 4.1% , according to a report by State Bank of India.
Energy supply chains under strain
Even if the conflict ends soon, restoring normal operations across the region’s energy infrastructure will take time. Damaged refineries will need repairs before they can resume full output, while other facilities may take weeks to restart.For instance, QatarEnergy’s LNG facilities could take several weeks to ramp up after a complete shutdown. Oilfields that have scaled back production will also require time to stabilise, and in some cases a loss of reservoir pressure could lead to a lasting drop in output.For now, global markets remain on edge as shipping firms, oil producers and governments closely monitor the situation for any signs that traffic through the strategic corridor could resume. Until then, the disruption risks keeping energy prices high and adding further strain to economies worldwide.
