Strait of Hormuz: Geopolitical Crossroads for $120 Oil?

The Strait of Hormuz, a 21-mile-wide waterway between Iran and Oman, is the world's most critical oil chokepoint. With 20 million barrels per day (b/d) of crude and refined products transiting its narrow passage in 2025—nearly 20% of global supply—it holds the fate of energy markets in its currents. As Iran-Israel tensions escalate, the risk of a full-scale conflict in the Persian Gulf has never been higher. For investors, the question is stark: Could this geopolitical powder keg push oil prices to $120+ per barrel? And how can portfolios hedge against such volatility?

The Strait's Strategic Significance

The Strait's centrality to global energy security is unmatched. Saudi Arabia, the region's largest exporter, shipped 7.178 million b/d of crude through the strait in late June 2025—the highest since 2023—while Iran's exports averaged 1.7 million b/d. Combined, these flows represent $1.2 trillion in annual trade at current prices.

Crucially, no viable alternative exists to fully replace the strait's capacity. Saudi Arabia's East-West pipeline and UAE's Fujairah terminal can reroute only 2.6 million b/d, leaving 17 million b/d exposed to disruption. Even a partial blockage—whether through mining, naval clashes, or Iranian threats—would send shockwaves through markets.

Geopolitical Risks and Price Scenarios

Current tensions mirror 2019's Houthi drone attacks on Saudi oil facilities and 2020's U.S.-Iran standoff, which briefly spiked Brent to $75/b. However, today's risks are more systemic.

• Scenario 1: Limited Disruption
  A temporary closure of the strait lasting weeks could cut global supply by 10–15 million b/d, pushing prices to $100+/b. The International Energy Agency (IEA) warns that spare capacity—concentrated in Saudi Arabia and Russia—is insufficient to offset such a loss.

• Scenario 2: Prolonged Conflict
  A months-long blockage, accompanied by attacks on LNG terminals or refineries, could trigger a $120+/b spike. This would strain economies reliant on Middle Eastern oil, particularly Asia, which imports 84% of Hormuz crude flows.

Why Investors Should Prepare for Volatility

Even without physical disruptions, the market's “risk premium” is already rising. In June 2025, Brent prices surged from $69/b to $77/b in days after Israeli airstrikes on Iranian sites. This sensitivity reflects investors' fears of the strait's vulnerability.

Hedging Strategies for Portfolio Resilience

1. Direct Energy Exposure
2. Long Positions: Buy oil ETFs like USO or USL (short-term) to capitalize on upward price swings.

3. Commodity Futures: Consider WTI or Brent futures contracts, but monitor rolling costs.

4. Sector Plays

5. Oil Majors: Firms like Chevron (CVX) or TotalEnergies (TTE.F) benefit from higher prices, though their equities may underperform if broader economic slowdowns occur.

6. Defense Contractors: Companies like Raytheon (RTX) or Lockheed Martin (LMT) could see demand for naval defense systems.

7. Hedging Tools

8. Inverse ETFs: Use SCO (short oil) or DWTI (inverse WTI ETF) to offset exposure to equities or bonds.

9. Options: Buy call options on oil futures to profit from volatility, or put options on energy stocks to mitigate downside risk.

10. Diversification Safeguards

11. Gold (GLD): A classic safe haven during geopolitical crises.
12. U.S. Treasuries (TLT): Bond yields typically drop in risk-off environments, providing portfolio stability.

Conclusion: Monitor the Strait, Manage the Risk

The Strait of Hormuz remains a geopolitical tinderbox. While outright closure is unlikely—given Iran's reliance on oil exports for 96% of its revenue—even minor disruptions could send prices soaring. Investors should treat this as a high-stakes game of “what if.”

Act now:
- Add 5–10% exposure to oil ETFs to your portfolio.
- Use options or inverse funds to hedge equity risk.
- Keep an eye on naval traffic data and geopolitical headlines for early warning signals.

In the words of the old trading adage: “Hope for the best, prepare for the worst.” The Strait's chokehold on global energy could soon test both.

Data sources: U.S. Energy Information Administration (EIA), S&P Global Commodities at Sea, Bloomberg vessel tracking.