Oil shock: when geopolitics shuts the taps

Oil markets have reacted violently to the latest escalation in the Middle East, with prices briefly surging more than 25% to above $118 per barrel before easing somewhat. The catalyst is the effective closure of the Strait of Hormuz, the most important artery in the global energy system.

Roughly 20 million barrels of oil typically pass through the strait each day, equivalent to around 20% of global oil supply. While the waterway has not been physically blocked, insurance constraints mean vessels are largely unwilling to transit the area. In practical terms, a significant portion of global supply has been temporarily removed from the market.

For energy markets, the implications are immediate. When supply is disrupted on this scale, inventories begin to fall and prices rise rapidly. Some producers are rerouting flows where possible, for example, Saudi Arabia redirecting shipments via the Red Sea but this only offsets part of the disruption. The net effect is still a large supply shortfall.

Importantly, the impact extends far beyond crude oil itself. Consumers don’t use crude directly; they use refined products such as jet fuel, diesel, petrol and heating oil. These markets can react even more sharply because refining capacity and logistics create additional bottlenecks. In Europe, for instance, jet fuel prices have already more than doubled this year.

Natural gas markets are also feeling the strain. Around 20% of global liquefied natural gas (LNG) exports normally pass through the Strait of Hormuz. With those flows disrupted, Asian buyers are competing for alternative supplies, pushing global gas prices higher and indirectly affecting Europe and other markets.
Where prices go from here depends largely on duration. If tensions de-escalate in the coming weeks, oil prices could retreat as supply chains normalise and markets rebuild confidence. But even in that scenario, it is unlikely prices will return to the $60–$70 range seen earlier this year. A geopolitical risk premium is likely to persist as importers rebuild inventories and reassess supply security.

If the disruption lasts longer, the consequences become more significant. Oil prices could spike further – potentially above $120 or even higher – until higher prices begin to curb demand. At that point, consumers and businesses change behaviour: driving less, flying less, or shifting to alternative energy sources. That process of “demand destruction” has historically acted as a natural ceiling for sustained price spikes.
Beyond the immediate crisis, there are also longer-term forces reshaping the oil market. Growth in US shale production is slowing as geology becomes more challenging. OPEC’s spare capacity is normalising after several years of surplus. And global demand forecasts suggest oil consumption may continue growing well into the 2030s or beyond under current policy trajectories.

In other words, the market may already have been transitioning from a period of oversupply into a structurally tighter environment. The current geopolitical shock could accelerate that shift.

For investors, this reinforces an important lesson: energy markets remain deeply sensitive to geopolitical risk. Periods of calm can persist for years, but when supply disruptions occur, prices adjust rapidly – and globally.

The coming weeks will determine whether this episode proves to be a short-lived spike or the start of a more sustained period of higher energy prices. Either way, the events of recent days have underscored the strategic importance of energy security in an increasingly uncertain world.