What is the potential price impact if both Red Sea and Strait of Hormuz are closed?

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Oil Prices Could Surge Past US$160 Per Barrel If Key Shipping Lanes Are Closed

If both the Red Sea and the Strait of Hormuz were to become effectively impassable to shipping, the price of oil could eventually exceed US$160 a barrel. This scenario is a significant concern given the current geopolitical tensions and the reduced global oil reserves. The world economy, which consumes over 100 million barrels of oil daily under normal circumstances, faces considerable risk from such a disruption.
Increased Risk from Current Middle East Conflict

The price of Brent crude has already surpassed US$100 a barrel, a level not seen since May, driven by escalating conflict in the Middle East. Attacks on Saudi tankers in the Red Sea by Houthi rebels have expanded the conflict zone and threaten to disrupt the export of millions of barrels of oil. This situation is more concerning than previous price spikes, such as those in March 2022 following Russia's invasion of Ukraine, because global oil reserves have been partially depleted.
Vulnerability of Red Sea and Strait of Hormuz Routes

The Red Sea is a critical alternative route for Saudi Arabia, which has increased shipments through the Red Sea port of Yanbu since the Strait of Hormuz faced closure. This workaround is now under threat, as blockades and attacks on ships could render passage through the Red Sea less viable. The potential closure of both these vital maritime passages would significantly limit global oil supply.
Depleted Reserves and Limited Market Buffers

Economic advisory firm Oxford Economics has warned that much of the world's spare production capacity has already been utilized. Furthermore, strategic and commercial oil inventories are lower than at the start of the recent conflicts. This leaves the global market with fewer buffers to absorb prolonged supply disruptions, diminishing its capacity to mitigate further price increases.
Offsetting Factors and Existing Reserves

Despite the significant risks, some cushioning factors remain. The International Energy Agency (IEA) noted increased exports from countries like Brazil, Kazakhstan, the United States, and Venezuela, as well as alternative export routes for oil from Saudi Arabia and the United Arab Emirates. Additionally, around 30 IEA member countries hold over a billion barrels of oil in reserve, and a record 1.35 billion barrels of oil were reported to be at sea in early July, which can help limit immediate price surges.

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What is the potential price impact if both Red Sea and Strait of Hormuz are closed?

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