Oil shock looms as Strait of Hormuz crisis fuels inflation fears

The intensifying Iran-Israel conflict has jolted global financial markets, with fears of a potential closure of the Strait of Hormuz — a vital conduit for 20 million barrels of oil and refined products daily — pushing oil prices toward $120 per barrel and threatening to reignite inflation worldwide.
While geopolitical tensions have long simmered in the Arabian Gulf region, the recent escalation is prompting more serious concerns about a possible supply shock that could upend the global economy and drive inflation to levels not seen since the early 2020s, analysts and market watchers argue.
The Strait of Hormuz, a narrow waterway in the Arabian Gulf handling 21 per cent of global petroleum liquids consumption, is a linchpin for energy markets. A prolonged disruption could destabilise economies, particularly in the GCC and energy-importing nations, by driving up costs for consumers and businesses.
Oil prices surged over 13 per cent after Israel's airstrikes on Iranian energy infrastructure, including oil refineries and the Pars South gas field, before settling eight per cent higher on Friday. Brent and West Texas Intermediate benchmarks marked their largest single-day gains since March 2022.
Analysts warn that a sustained blockade of the Strait could push oil prices beyond $120 per barrel, potentially lifting the US consumer price index (CPI) to five per cent. In May, US headline inflation was 2.4 per cent, with core CPI at 2.8 per cent, but rising energy costs could reverse this progress.
'The Strait of Hormuz is a critical chokepoint,' said Jorge Leon of Rystad Energy. 'Over 80 per cent of its 12 million barrels per day of crude oil flow to Asia, with total volumes reaching 20 million barrels including refined products.' While Saudi Arabia and the UAE have pipelines bypassing the Strait, their capacity covers only half the current flow, leaving markets vulnerable to supply shocks.
Kristian Kerr of LPL Financial noted that Iran's potential closure of the Strait is the primary market concern, given its role in global oil and gas transit.
In the GCC, higher oil prices would elevate costs for fuel, transportation, and manufacturing, squeezing household budgets. In some GCC countries, where fuel subsidies mitigate price spikes, governments may face fiscal strain to maintain these measures.
In Oman and Bahrain, consumers could face sharper rises in living costs, deepening economic inequality. Globally, major oil importers like China, India, Japan, and South Korea, reliant on the Strait for over 80 per cent of their oil, would see higher energy costs fuel broader inflation. In the US and Europe, rising fuel prices could increase transportation and heating expenses, hitting consumers and businesses.
J.P. Morgan's Natasha Kaneva warned that sustained oil prices above $100 per barrel could undo months of cooling consumer prices, with a preferred range of $60 to $65 per barrel to avoid inflationary spikes.
Tim Urbanowicz of Innovator added that rising energy costs could permeate CPI components like food and transport, amplifying price pressures. The economic fallout would be particularly acute for import-dependent nations, where higher shipping and production costs could raise prices for goods from electronics to groceries.
Despite the risks, some analysts downplay the likelihood of a full closure. Kenneth Pollack, a former CIA Arab Gulf analyst, suggested Iran would avoid such a move to prevent alienating allies like China or provoking Western intervention. George Saravelos of Deutsche Bank called a closure a 'last resort' due to its severe global impact. Mitigation options include Opec's spare capacity, particularly from Saudi Arabia and the UAE, and US strategic oil reserves, though these may only partially offset a prolonged disruption.
Shipping firms are already adapting. Dubai-based Gulf Navigation has implemented enhanced risk measures, including rerouting and crew training. Bimco reported that shipowners are avoiding the Red Sea and Arab Gulf, opting for longer routes around the Cape of Good Hope, which raises shipping costs and delays. India's shipping directorate urged vessels to exercise caution in the Strait, reflecting heightened maritime risks. Past Houthi attacks on Red Sea shipping, linked to Iran's proxies, forced similar rerouting, increasing costs that could further inflate prices for GCC consumers.
The conflict's economic ripples extend beyond oil. Potential disruptions by Iran's proxies, like the Houthis, add uncertainty to global trade routes. Last year's Red Sea attacks raised shipping costs, a scenario that could recur, compounding the impact of higher energy prices. For GCC households, this could mean pricier imported goods, exacerbating the cost-of-living squeeze.
As tensions persist, the economic stakes are high. Analysts warn that a sustained Strait closure would spike oil prices, fuel inflation, and strain global economies. Markets remain on edge, with investors and policymakers bracing for further developments in the Iran-Israel conflict.

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