What is the potential oil price if Red Sea and Hormuz routes close?

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Potential Oil Price if Red Sea and Hormuz Routes Close

If both the Red Sea and the Strait of Hormuz become effectively impassable to maritime traffic, the price of oil could exceed US$160 per barrel. This scenario poses a significant risk to the global economy, given that global oil reserves are already diminished and current production levels are below pre-conflict figures.
Impact of Red Sea and Hormuz Closure

The closure of these two critical maritime passages would severely disrupt global oil supply chains. The Red Sea is a vital alternative route for Saudi Arabia's oil exports, particularly since the Strait of Hormuz faced potential closure. Saudi Arabia had increased shipments via pipeline to the Red Sea port of Yanbu, enabling it to export approximately three-quarters of its pre-conflict levels. However, attacks on tankers in the Red Sea by Houthi rebels have created headwinds for this workaround, making passage less viable.
Depleted Reserves and Production Shortfalls

The global market has fewer buffers against prolonged supply disruptions due to already utilized spare production capacity and lower strategic and commercial oil inventories compared to the onset of the conflict. In mid-July, the International Energy Agency (IEA) reported that world production was approximately 9.4 million barrels per day below pre-war levels. This reduced market flexibility means there is less room for manoeuvre in the event of significant supply shocks.
Current Oil Price Dynamics

Brent crude has recently surpassed US$100 a barrel, reaching this level for the first time since May. This surge is partly attributed to attacks on Saudi tankers in the Red Sea, which threaten to expand the conflict zone and could cut off millions of barrels of oil exports daily. The world economy typically consumes slightly over 100 million barrels of oil per day, underscoring the potential impact of such disruptions.
Cushioning Factors and Risks

Despite the risks, some cushioning factors exist, including increased exports from various countries and alternative routes for oil from Saudi Arabia and the United Arab Emirates. Producers like Brazil, Kazakhstan, the United States, and Venezuela are boosting their output, and a significant volume of oil is currently at sea, which can help limit further price increases. Nevertheless, the European Central Bank has expressed alarm over the situation, noting its immediate impact on oil prices and the potential for renewed inflationary pressure that could influence interest rate decisions.

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What is the potential oil price if Red Sea and Hormuz routes close?

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