What is the Strait of Hormuz and why is it so important for oil markets? 

Tankers at the Khor Fakkan Container Terminal, the only natural deep-sea port in the region and one of the major container ports in the Sharjah Emirate, along the Strait of Hormuz, a waterway through which one-fifth of global oil output passes on June 23. Photo by GIUSEPPE CACACE/AFP via Getty Images

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On Sunday, Iran’s state-owned Press TV media outlet reported that the country’s parliament voted to close the Strait of Hormuz in response to U.S. strikes on its nuclear facilities. The strait is a vital transport route for major Middle East oil and liquified natural gas (LNG) producers. What is the likelihood that Iran will cut off the trade route and what would such a closure mean for global energy supply and oil prices? The Financial Post explains.

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What is the Strait of Hormuz?

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The Strait of Hormuz is a 167-kilometre-long sea passage that connects the Persian Gulf to the Indian ocean. Bordered by Iran on one side and Oman and the United Arab Emirates on the other, it is a crucial route for shipping crude oil and liquified natural gas from countries such as Iran, Iraq, Kuwait, Bahrain, Qatar, Saudi Arabia and the United Arab Emirates. About 20 per cent of the world’s oil and gas demand flowed through the strait in 2024, according to the U.S. Energy Information Administration (EIA).

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The EIA calls Hormuz “one of the world’s most important oil chokepoints,” as there are few alternatives to move oil from the Gulf states. In a note released on Monday, Capital Economics estimates that no more than 30 per cent of existing oil flows could conceivably be redirected, citing the East-West pipeline in Saudi Arabia, which connects to the Red Sea, and a pipeline in the United Arab Emirates as two potential means of bypassing the Strait of Hormuz.

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Options for Iran are limited, as 96 per cent of the country’s oil exports flow through its main export terminal on Kharg Island, located northwest of the strait, according to commodities and shipping intelligence firm Kpler.

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Capital Economics points out that Middle Eastern LNG exports, the vast majority of which comes from Qatar, cannot be redirected. “The lack of an alternative for rerouting LNG flows has contributed to the sharp rise in natural gas prices since the start of the conflict,” it said.

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Where do most of its energy exports go?

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An estimated 84 per cent of crude oil and condensate and 83 per cent of liquefied natural gas that flowed through the Strait of Hormuz in 2024 went to markets in Asia, according to EIA data.

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“China, India, Japan, and South Korea were the top destinations for crude oil moving through the Strait of Hormuz to Asia, accounting for a combined 69 per cent of all Hormuz crude oil and condensate flows in 2024,” said the EIA. “These markets would likely be most affected by supply disruptions at Hormuz.”

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For China, Iran is particularly important. China buys around 90 per cent of Iran’s global oil exports, according to Kpler.

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Capital Economics’ report noted that nearly 50 per cent of China’s crude oil imports come from Iran, giving China “outsized influence” on its ally and “a vested interest in keeping energy trade flowing.”