COMMENT: Hormuz disruption unlikely to drive sustained oil price surge – Fitch

The effective closure of the Strait of Hormuz following the outbreak of conflict involving Iran is unlikely to persist long enough to trigger a sustained surge in global oil prices, according to Fitch Ratings, which argues that structural oversupply in the oil market should limit the geopolitical shock.

Fitch said the strait — a critical corridor for global energy trade — has not been formally closed but is being widely avoided by shipping because of heightened security risks. The ratings agency said “the effective closure of the Strait of Hormuz … is likely to be temporary given its vital economic role”, noting that its continued disruption would harm both exporters and importers of oil.

Tanker traffic through the narrow waterway has slowed sharply since the conflict escalated on February 28. Oil majors have halted shipments through the area on safety grounds while insurers have withdrawn war risk coverage for vessels operating there. As bne IntelliNews reported, traffic has been halted after insurance companies cancelled war-risk coverage thanks to the threat of Iranian missile attacks in the narrow waterway.

Several oil tankers have already been hit and the cost of recapitalisation to cover an active war zone is exorbitant, so insurance brokers chose to cancel coverage instead.

To break the impasse, US President Donald Trump has ordered the US Development Finance Corporation (DFC) to step in and provide the insurance instead. However, questions have already been raised as the DFC will also need to be recapitalised to provide enough funds to adequately cover the potential losses.

In a repeat of the Iran–Iraq “tanker war” of the 1980s, Trump is also proposing to escort tankers through the straits with US battleships, but their proximity to the shore – the straits are only 34km wide – means these ships would be exposed to not only Iranian missiles, but to land-launched drone swarms too.

Before the escalation, roughly 20mbpd of crude oil and petroleum products moved through the strait, representing about a quarter of global seaborne oil trade and roughly one-fifth of global oil consumption. Around half of these volumes originate from Saudi Arabia and the United Arab Emirates, with Iraq, Kuwait and Iran accounting for most of the remainder. Much of the crude transported through the route is destined for China and India.

Despite the disruption, Fitch said the structure of the global oil market should cushion the price impact. Before the conflict broke out the International Energy Agency (IEA), expected global oil supply to exceed demand by around 0.6–0.7mn barrels per day in 2026 under its base-case outlook. Demand growth was projected to be roughly 1.0–1.1mbpd outstripped by supply growth of roughly 1.6–1.7mbpd.

The agency said that “global oil market oversupply … should limit the geopolitical risk premium and cap risks to oil price increases”, adding that it does not expect a significant increase to its forecast average Brent price of $63 per barrel for 2026.

Supply growth has already been outpacing demand. Global oil supply rose by about 3mn barrels per day in 2025 while demand increased by less than 1mn barrels per day. Fitch forecasts supply growth of 2.4mbpd in 2026 compared with demand growth of around 0.8 mbpd.

Stockpiles also provide a buffer. Global observed inventories rose by 1.3mbpd in 2025, leaving total inventories at 8.2bn barrels at the end of the year — levels that Fitch estimates could cover a complete halt in shipments through Hormuz for more than 400 days.

Shortages appear in a long conflict

Removing oil delivered via the Gulf from global markets for any length of time could fundamentally alter Fitch’s calculus. The oil surplus projected for 2026 could quickly turn into a deficit.

The IEA had expected supply to exceed demand by roughly 0.6mn barrels per day, reflecting continued growth in non-OPEC production and relatively modest demand growth. However, the Strait of Hormuz alone normally carries about 20mn barrels per day of crude oil and petroleum products.

Even if a disruption did not halt all shipments, the loss of Gulf exports would quickly push the market into a substantial deficit. Some volumes could still reach international markets through alternative routes. Saudi Arabia’s East–West pipeline to the Red Sea has a capacity of about 5mn barrels per day, while the UAE’s pipeline from Abu Dhabi to Fujairah on the Gulf of Oman can transport roughly 1.5mn to 1.8mn barrels per day. These bypass routes would partially mitigate the disruption, but a significant share of exports would remain stranded.

Analysts estimate that even after accounting for such alternatives, a prolonged interruption could remove roughly 12mn to 15mn barrels per day from global supply. Compared with the IEA’s projected surplus of 0.6mn barrels per day, this would represent a dramatic reversal, potentially creating a deficit of more than 11mn barrels per day.

In practice, a shock of this scale would likely trigger emergency responses across the market. Strategic petroleum reserves could be released, producers outside the region might accelerate output, and sharply higher prices would curb demand. But excess production capacity outside of the Gulf is limited. As one of the non-Gulf major oil producers, Russia could increase production, but it has limited spare capacity of only 0.2-0.3mbpd as without put at 9.3mbpd it is already operating at its technical maximum.

The agency cautioned that risks remain if the conflict intensifies. “Any protracted blockage of the strait or material and sustained damage to the region’s oil and gas production and transportation infrastructure would materially affect oil markets,” Fitch said, warning that such a scenario would likely drive a stronger increase in oil prices.