Why Oil Prices Dropped Right after Trump Announced Iran-Israel 'Ceasefire'

Blocking the Strait of Hormuz would have hurt Iran more than Israel, writes Aditi Bhaduri.

The importance of the Strait as a critical geo-strategic, non-military lever for oil-rich Iran was not lost on anyone.

(Photo: Kamran Akhter/The Quint)

After days of being on an upward swing amid the Israel-Iran conflict, oil prices dropped dramatically by five percent on Tuesday, 24 June, within hours of US President Donald Trump's "announcement" of brokering yet another "ceasefire"—this time between Iran and Israel—before either nation made any official statement.

Oil prices had skyrocketed after 13 June, when Israel first launched strikes on Iran under Operation Rising Lion. This led to Iran responding with airstrikes and threats to close the Strait of Hormuz, a key global shipping route for the movement of oil and gas.

With the US entering the fight with direct air strikes on three Iranian nuclear sites on 22 June, Iran's Parliament voted to authorise the potential closure of the Strait, which it controls from the northern side, sparking global concerns. Iran also targeted the largest US military base in the Middle East in Qatar.

With the conflict now seemingly moving toward de-escalation, the Strait seems to be out of the woods, for now, as stabilising oil prices may indicate. Yet, the importance of the Strait as a critical geo-strategic, non-military lever for oil-rich Iran was not lost on anyone.

Choking of the Strait could deal a severe blow to the global economy already reeling under uncertain and unilateral trade and tariff measures.

The Significance of Hormuz

Amid loud nuclear speculation, global anxieties over the closure of Hormuz—one of the world's most critical oil shipping chokepoints—had quietly been riding up since the start of the Israeli onslaught on Iran.

The 167-km-long waterway separates Iran and Oman, linking the Persian Gulf to the Gulf of Oman and Arabian Sea. It is 33 km wide at its narrowest point. But the shipping lane is barely two-three km wide in either direction.

Almost a fifth of the world's oil passes through the Strait. So far this year, 34 percent of all seaborne-traded oil has transited the Strait of Hormuz.

Most crude exported from Saudi Arabia, Iran, the UAE, Kuwait and Iraq—all members of the Organisation of the Petroleum Exporting Countries (OPEC)—is shipped through the waterway. It is also the route used for moving nearly all the liquefied natural gas (LNG) produced by the world’s biggest LNG exporter, Qatar.

Any choking of the route would imply immense disruption in trade and energy supplies, triggering fears of an energy crisis. The Houthis of Yemen—a proxy of Iran—have already significantly disrupted international trade and shipping with their attacks in the Red Sea following the outbreak of Israel-Hamas war on 7 October 2023, which is still continuing.

A closure of the Strait now would have triggered an oil shock, inflated crude price, raised freight costs, reignited inflation, stalled rate-cut plans and squeezed global households.

Economists at Oxford Economics earlier warned that a "worst-case scenario" could see oil prices surge to $130 a barrel, reducing global GDP by 0.8 percent. Countries had already issued advisories to their shipping and trade to reassess movements through the Strait.

Iran, well aware of the Strait's economic significance, threatened to shut it down soon after US intervention and before the ceasefire. The matter was even raised in Iranian Parliament where the nation's leaders supported the blockade. Even with the 'ceasefire' being declared, the final decision on the closure of the Strait of Hormuz rests with the Supreme National Security Council and the Supreme Leader Ayatollah Ali Khamenei. Despite the pre-ceasefire posturing, however, the simmering threats to block Hormuz would have been hard to bring to an actual boil for Iran without burning its own fingers.

A Familiar but Unlikley Threat

During every crisis in the region, Iran has threatened to close the Strait of Hormuz. It did so in January 2012, in retaliation to the US and European sanctions that targeted its oil revenues in an attempt to stop Tehran’s nuclear programme.

It did so again in July 2018, when then Iranian President Hassan Rouhani hinted Iran could disrupt oil flows through the Strait in response to US calls to reduce Iran’s oil exports to zero. A Iranian Islamic Revolutionary Guard Corps (IRGC) commander also said Iran would block all exports through the Strait if Iranian exports were stopped.

In 2019, again, when tensions flared between Iran and the US over the IRGC chief Gen Qasim Soleimani, Iran threatened to close the critical chokepoint.

Yet, at no point has the Islamic Republic effected a total closure of the Strait, even though it did target international shipping through the Strait during these times of crises.

Even during the infamous "Tanker Wars" in the 1980s when during its war with Saddam Hussein's Iraq when both Iran and Iraq targeted each other's shipping , there was no full closure of the Strait.

In terms of exports, both Saudi Arabia and the UAE, two of the major energy exporters have alternatives with pipelines operating to the Red Sea coast and to the port of Fujairah, which lies beyond the Strait of Hormuz.

The other exporter Qatar is a friend—one of the few that Iran has in the Arab world—whom Iran would not want to roil. On the other hand, 76 per cent of the oil passing through the Strait is headed for Asian markets: China, India, South Korea, and Japan.

Geopolitical Hurdles

China is one of Iran's few friends and a strategic partner. When asked about Iran's parliament reportedly endorsing closure of the Strait and whether China has held talks with Iran regarding the issue, Chinese Foreign Ministry spokesperson Guo Jiakun said on Monday, 23 June, that the Persian Gulf and its surrounding waters were vital channels for international goods and energy trade.

China stressed that safeguarding security and stability in the region serves the common interests of the international community. The spokesperson also reiterated China's calls on the international community to intensify efforts to de-escalate tensions and prevent regional instability from having a greater impact on global economic development.

The message was clear—China would not endorse such a closure by its friend, Iran.

India, South Korea, and Japan are all countries Iran would not wish to strain ties with, especially at this critical juncture. Moreover, India has also assured that it is sourcing oil from other sources, primarily Russia, hence a closure would not impact it hard.

At the same time, while Iran's archrival Israel would remain unaffected by such a closure, it would end up hurting Iran's oil trade as well as those of friendly countries.

The European Union (EU)'s foreign policy chief Kaja Kallas has warned that Iran closing the Strait would be "extremely dangerous and not good for anybody". Iran may not want to cross swords with the EU, on which, in spite of angry rhetoric, may be banking for the facilitation of future negotiations.

Finally, choking the Strait would have certainly invited further punitive action by the US. The American Fifth Fleet, based in Bahrain, is tasked with protecting commercial ships in the area. During the 2019 flare-up, the US had raised with its allies, including Japan, the possibility of forming a coalition of the willing to protect commercial vessels in the Strait and Bab el-Mandeb.

This time around, Trump has proved his willingness and ability for military intervention and escalate the situation if necessary. 

Iran's planned and pre-informed strike on the US military base at Al Udeid in Qatar last night, in which no American personnel were injured, proves that it does not seek further escalation of the situation.

Hence, no matter how tempting, it may refrain from a total closure of the Strait of Hormuz. Of course, exceptional times call for exceptional means and methods. And the situation in the Middle East has never been so volatile as it is now.

It may, thus, be quite possible that in case of any eventuality, Iran may still take the unprecedented step of choking the Strait of Hormuz entirely. However, while not impossible, it is quite improbable.

(The author is an award-winning journalist specialising on Eurasian affairs. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)