The disruption in the Strait of Hormuz isn't a formal closure. Instead, shippers and producers are adopting a "wait and see" approach, halting flows due to reports of damaged ships and skyrocketing insurance premiums, effectively creating a self-imposed blockade.
While global spare oil capacity exists as a buffer, it is heavily concentrated in Saudi Arabia, the UAE, and Kuwait. During a conflict, if the Strait of Hormuz is effectively closed, this capacity becomes physically trapped and cannot be deployed to global markets, nullifying its role as a price stabilizer.
The impact of an oil supply disruption on price is a convex function of its duration. A short-term closure results in delayed deliveries with minimal price effect, while a prolonged one exhausts storage and requires triple-digit prices to force demand destruction and rebalance the market.
The recent surge in oil prices to $78 per barrel is not just vague fear. Analyst models suggest the market has priced in an $8-13 risk premium, which corresponds directly to the expected impact of a complete, four-week closure of the Strait of Hormuz, providing a concrete measure of market sentiment.