Despite the U.S. and Israel launching attacks on Iran, which killed its supreme leader and triggered a regional war with retaliatory strikes from Iran and its proxies against neighboring countries, crude oil prices increased by just a modest 6% on March 2.
Energy analysts warned that with the Strait of Hormuz—the globe’s largest bottleneck for oil and gas shipments—effectively closed due to the conflict, prices could climb significantly higher if oil shipments don’t restart by week’s end or soon after.
“The Strait of Hormuz is essentially closed, and yet prices are only up a little bit,” noted oil forecaster Dan Pickering, founder of consulting and research firm Pickering Energy Partners, acknowledging he had anticipated a stronger market response.
“The oil price reaction is telling us that, so far, this is contained,” Pickering said. “The expectation is the U.S. will do something to open, and keep open, the strait so oil can flow.”
The slender, 104-mile waterway serves as the primary bottleneck separating the Persian Gulf—and its daily movement of nearly 20 million barrels of oil—from the Indian Ocean and worldwide energy markets. Approximately 20% of global oil and natural gas exports pass through the strait daily—at least until now. Saudi Arabia, Iraq, Iran, Kuwait, Qatar, and the United Arab Emirates all rely on this channel for their export shipments.
Although oil and gas exports aren’t officially halted, several tankers have suffered damage, and an increasing number of third-party insurers are declining to provide coverage for vessels transiting the strait. A few refineries in Saudi Arabia and Kuwait have experienced minor damage, and Qatar—the world’s second-largest natural gas exporter—has temporarily suspended most of its export operations.
The U.S. might need to provide some form of security assurance to address the hesitation among third-party insurers to cover oil tankers. “If that happens, tankers move. Until that happens, tankers wait,” Pickering stated.
However, it’s worth noting that Iran and its proxies have not targeted any oil and gas production facilities so far, according to Jaime Brito, executive director for refining and oil products at OPIS energy pricing research firm.
Brito observed the “relatively benign” market response to date.
“It’s really quite interesting to see that the market prices have not completely reacted in an emotional manner,” Brito commented. “It looks like they’re realistically waiting to see if there are more specific confirmations of energy asset attacks before reacting more.”
Pricing impacts
A $4 increase in oil prices on March 2 might appear insignificant, but prices had already started responding to regional tensions prior to the formal U.S. and Israeli attacks.
The U.S. crude oil benchmark climbed from approximately $67 to $71 per barrel on March 2. However, it began the year at $57 per barrel and has been steadily increasing due to mounting tensions between the U.S. and Iran.
From that perspective, prices have surged 25% since the start of the year. For context, the year began with the lowest price levels since the pandemic due to a fundamental global oversupply and a relative absence of geopolitical disturbances.
Consumers are anxiously monitoring the downstream effects on pump prices. The national average for a gallon of regular unleaded gasoline reached a multi-year low of $2.73 per gallon earlier this year. It has now climbed back to $2.96 and continues to rise, meaning it will breach the $3 threshold any day now, according to Patrick De Haan, head of petroleum analysis at GasBuddy.
“In the week ahead, gasoline prices are likely to face heightened upward pressure as seasonal trends continue and markets navigate this evolving geopolitical landscape, with the national average poised to reach the $3-per-gallon mark for the first time this year,” De Haan said.
Indeed, there’s a huge difference between the Strait of Hormuz being affected for a few days and the logistical catastrophe of a multi-week shutdown, Brito noted.
“Then we are in for significant increases in prices,” Brito warned, adding that prices could surge above $100 per barrel for the first time since Russia’s invasion of Ukraine in 2022.
President Trump told CNN on March 2 that the “big wave” of strikes against Iran has yet to materialize. “We haven’t even started hitting them hard,” he stated, adding that he believed the operation would continue for approximately four weeks.
Natural gas prices soar in Europe
Effects on natural gas prices have been subdued in the U.S., the world’s largest gas producer. However, Europe and Asia are heavily reliant on supplies from Qatar and other sources, particularly in nations where winter conditions persist. Natural gas prices surged nearly 50% in Europe on March 2—standing out as an exception to the relative market calm.
Risks persist that a desperate Iran could strike more aggressively at oil tankers or the energy infrastructure of Saudi Arabia, Kuwait, Qatar, and the UAE. Iranian proxies, such as Hezbollah in Lebanon or the Houthis in Yemen, could further escalate tensions. After all, the Houthis possess considerable experience in targeting oil assets.
“Although the Gulf States didn’t join the U.S. in its attack on Iran, they are now on the receiving end of retaliatory attacks from Iran,” noted Adriana Alvarado, senior vice president for Morningstar global sovereign ratings. “The overall economic impact on the Gulf economies will largely depend on the length and severity of the disruptions to air travel and to traffic on the Strait of Hormuz. But no doubt that whatever the outcome of the current confrontation, political developments in Iran will have lasting consequences for the whole Middle East region.”
And a single misstep could always spark a much broader escalation, Pickering cautioned.
“Every day, the reactive capability of Iran goes down,” Pickering said. “But we still have the risk of an accident, luck, or an errant missile that could be meaningful. Wild things can happen in a war.”