Background: Israel’s Surprise Strikes on Iran Lead to Open War

Tensions between Israel and Iran erupted into open conflict in mid-June 2025. Hostilities began on June 13 when Israel launched a surprise attack against Iranian military and nuclear targets. By the second week of the conflict, the United States joined Israel’s campaign: on June 22, U.S. forces dropped bunker-buster bombs on Iran’s Fordow nuclear facility, and U.S. submarines fired missiles at other nuclear facilities in Iran.

In response, Iran’s parliament responded by approving a move to close the Strait of Hormuz, a vital waterway for Persian Gulf oil exports; however, closing the strait would still require sign-off from Iran’s top security council.

The Strait of Hormuz

As shown in the map below,¹ the Strait of Hormuz forms a natural choke point for shipping in the Middle East, both for exports of oil and other trade requirements.

Located between Iran and Oman and just 21 miles wide at its narrowest point, this waterway serves as the primary export route for oil from the Persian Gulf region. The strait also facilitates the transportation of approximately 20% of global liquefied natural gas (LNG) trade, primarily from Qatar.²

To illustrate the amount of shipping traffic going through this key waterway at any one time, below is a snapshot of the ship traffic within the Strait of Hormuz.³

Given that the Strait of Hormuz is only 21 miles wide at its narrowest point, this makes it highly vulnerable to strategic threats. Iran could disrupt shipping using naval mines, fast-attack boats, anti-ship missiles, tanker blockades, and/or special forces boarding teams.⁴

Most of the oil passing through the strait is destined for Asian markets, with China, India, Japan, and South Korea accounting for 67% of all crude oil flows through the waterway.⁵ In contrast, the United States imports only about 7% of its oil through the Strait of Hormuz, representing just 2% of its total petroleum consumption.⁶

If Iran were to choose to completely block the strait, it would not only spook global markets but also choke off Iran’s own oil exports. This would be a self-destructive move by Iran that could destabilize its economy and disrupt vital trade with China, which purchases a large percentage of the total Iranian oil produced.⁷

Economic Impact

Crude oil prices jumped initially on war fears, with Brent crude briefly exceeding $80 per barrel⁸ during the conflict, its highest level since January.

With the current ceasefire in place, some of these economic pressures are now easing, as reflected in falling Brent oil prices. However, the Israel-Iran ceasefire is fresh and could yet falter, so businesses and shippers are not letting their guard down.

Strategic Petroleum Reserves

Global strategic petroleum reserves provide some buffer against supply disruptions. Between commercial and strategic petroleum inventories on land and on the water, the world can mobilize approximately 4 billion barrels of oil. A disruption from a blockade in the Strait of Hormuz, without further damage, could be dealt with for many months.⁹

However, the U.S. Strategic Petroleum Reserve is currently at its lowest levels since the 1980s, with under 350 million barrels, following substantial drawdowns under the previous Biden administration.¹⁰

Risks Looking Ahead

A complete closure of the Strait of Hormuz would have a significant impact on global oil markets. Multiple analytical sources provide consistent projections:

• JPMorgan: The oil market is now factoring in a one in five chance of a material disruption in Gulf energy production flows. If this worst-case scenario were to occur, J.P. Morgan estimates prices could rise to $120-$130 per barrel.¹¹
• Oxford Economics: A complete closure could lift oil prices to $130 per barrel under the most severe scenario.¹²
• Goldman Sachs: Oil prices could reach $110 per barrel if the Strait of Hormuz is blocked.¹³

These oil price spikes would translate to significant increases in gasoline and diesel prices, with estimates suggesting increases of up to $1.25 per gallon.¹⁴

In essence, Iran’s threat to close the Strait of Hormuz is significant, but executing a full blockade would largely hurt Iran itself more than its adversaries. Conversely, increased U.S. shale production offers flexible, speedy relief to global markets if there exists the opportunity for exploration and production companies to earn their target rates of return.

WTI Strip Prices Increase

Spot prices and futures prices for the West Texas Intermediate (WTI) contract increased approximately $2.75 per barrel in the near term and increased approximately $0.25 over the longer term.

WTI Strip Prices — One Month Change

As shown, after the expectation of lower near-term pricing, the oil price curve is shifting to a state of “contango,” reflecting the market’s expectation of higher future spot prices over the longer term. As mentioned in last month’s blog, certain energy executives indicated that the break-even price to justify drilling new wells is $65 per barrel, which could be a factor for the market’s expectation of higher future spot prices in the longer term.

Oil Price Outlook

The price distribution below shows the crude oil spot price on July 7, 2025, as well as the predicted crude oil prices based on options and futures markets. Light blue lines are within one standard deviation (σ) of the mean, and dark blue lines are within two standard deviations.

WTI Crude Oil $/BBL

Based on these current prices, the markets indicate there is a 68% chance oil prices will range from $54.00 and $78.00 per barrel in mid-October 2025. Likewise, there is roughly a 95% chance that prices will be between $38.00 and $119.50. By mid-December 2025, the one-standard deviation (1σ) price range is $51.00 to $79.50 per barrel, and the two-standard deviation (2σ) range is $34.50 to $125.00 per barrel.

Insights

Remember that while option prices and models reflect expected probabilities rather than certain outcomes, they remain a useful tool for assessing market expectations and risk. Throughout most of 2023 and 2024, crude oil spot prices generally fluctuated within the range of $70 to $90 per barrel. During that period, we observed general increases in futures price volatilities as prices approached the upper and lower bounds of that range. In recent months, crude oil spot prices have generally remained below that range, apart from a brief spike driven by the conflict between Israel and Iran. For mid-December 2025 pricing as of July 7, 2025, the 1σ range had a spread of $28.50 per barrel, and the 2σ range had a spread of $90.50 per barrel, indicating a general increase in spreads as the impacts from the Israel-Iran conflict remain uncertain.

1. Google Earth, June 30, 2025.
2. Emily Mae Czachor, “Strait of Hormuz could be vulnerable to Iran retaliation. Here's what to know about the vital oil trade route,” CBS News, June 23, 2025.
3. ShipTraffic.net, June 30, 2025.
4. Spencer Jakab, “Iran Has an Oil Card to Play. So Does the U.S.,” Wall Street Journal, June 23, 2025.
5. “The Strait of Hormuz: the world’s most important oil transit chokepoint,” American Journal of Transportation, November 21, 2023.
6. Emily Mae Czachor, “Strait of Hormuz could be vulnerable to Iran retaliation. Here's what to know about the vital oil trade route,” CBS News, June 23, 2025.
7. David McHugh, “The Strait of Hormuz is a vital route for oil. Closing it could backfire on Iran,” Associated Press, June 23, 2025.
8. “Petroleum & Other Liquids,” U.S. Energy Information Administration, webpage, June 30, 2025.
9. John van Schaik, “Hormuz Threat: Ample Stocks Provide a Months-Long Buffer,” Energy Intelligence, July 7, 2025.
10. Peter Aitken, “White House: No Imminent Plans for Refilling Strategic Petroleum Reserves,” Newsweek, June 26, 2025.
11. Andreas Exarheas, “Oil Market Sees 1 in 5 Chance of Material Gulf Disruption,” Rigzone, June 24, 2025.
12. Niamh Kearney, “Impact of the Iran-Israel escalation on oil prices,” OxfordEconomics.com, June 23, 2025.
13. “HSBC, Goldman Sachs see Brent oil hitting $80-110 if Strait of Hormuz blocked,” Reuters, June 23, 2025.
14. Mudit Dube, “Oil prices surge 5% as Iran threatens Hormuz strait closure,” NewBytes, June 23, 2025.