Oil markets opened the week with a sharp jump. Brent crude rose more than 25% since Friday and briefly moved above 115 dollars per barrel. One of the most negative scenarios for global energy markets is beginning to unfold. Shipping through the Strait of Hormuz has effectively stopped and there is no clear timeline for when oil flows may return to normal.
The Strait of Hormuz is one of the most important energy chokepoints in the world. Under normal conditions roughly 20% of global oil and LNG supplies pass through the narrow waterway. At the moment that flow has effectively dropped to zero. The strait is technically still open, but the threat of missile and drone attacks has made shipping companies unwilling to risk passage. The worst scenario, the mining of the roughly three kilometer wide channel, has not occurred, but the security risks alone have been enough to halt traffic.
For the oil market this represents a major supply shock. Over the past week oil prices have already risen by almost 40%. The Strait of Hormuz has never been fully closed in modern history, which adds to investor anxiety. On Wall Street some analysts are starting to discuss a scenario similar to the oil embargo of the 1970s.
Financial markets are responding with increased caution. The VIX volatility index is hovering around 35 points, its highest level since April 2025 when Donald Trump announced tariffs on most of the world’s economies. Actual market volatility remains somewhat lower than what the VIX suggests, and according to the CNN Fear and Greed Index markets have not yet reached a stage of extreme panic.
For equity markets the key issue is inflation. Higher oil prices quickly translate into more expensive fuel, which then spreads through the broader economy. This increases inflationary pressure and complicates the outlook for central banks. Investors now expect a slower pace of interest rate cuts in the United States. In Europe some market participants are even beginning to price in the possibility that the ECB or the Bank of England could raise rates again later this year.
Oil prices initially jumped by as much as 25% early Monday. However, some of those gains were later reversed after the Financial Times reported that G7 countries are discussing the potential release of up to 400 million barrels from strategic reserves. Prices quickly corrected by about 15 dollars per barrel. This highlights how volatile the market currently is. If the geopolitical situation were to deescalate, prices could also fall quickly.
Countries in the Persian Gulf are trying to redirect part of their exports through terminals in the Red Sea. However, those routes can replace only about one third of the volumes that normally pass through the Strait of Hormuz. As a result some producers are being forced to reduce output, which could prolong the time needed for the market to stabilize even after shipping eventually resumes.
If the disruption continues, upward pressure on oil prices will likely persist. A move toward 120 dollars per barrel now appears to be the next potential milestone. The trajectory will depend primarily on the geopolitical situation. Each day that shipping through the Strait of Hormuz remains disrupted increases the risk of further price spikes.
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