Oil Explained: Why Hormuz Matters

The Strait of Hormuz is unlike any other chokepoint in the world because of the sheer volume of energy that passes through it daily. At approximately 20-21 million barrels per day — roughly 21% of global petroleum consumption — no other waterway comes close. The Strait of Malacca, the second-busiest chokepoint, handles about 16 million barrels per day but has viable alternative routes through the Lombok and Sunda straits. Hormuz has no such luxury: the combined pipeline bypass capacity is only 7 million barrels per day, leaving a 13 million barrel per day gap with no alternative.

The strait's geography compounds the problem. At its narrowest point between Iran and Oman, the waterway is only 21 nautical miles wide, with just two 2-mile-wide navigation channels for inbound and outbound traffic. This constriction means that even in normal operations, ships must navigate a precise corridor with minimal room for deviation. In a crisis scenario, the combination of military activity, mines, and commercial anxiety can reduce this already limited throughput to a fraction of its normal capacity.

Brent crude, priced from the North Sea between the UK and Norway, serves as the international benchmark for approximately two-thirds of the world's oil. When Hormuz disruptions occur, Brent reacts first and most violently because it reflects the price of seaborne crude — the very type of oil that would normally transit the strait. WTI (West Texas Intermediate), priced at the Cushing, Oklahoma hub, is more influenced by US domestic supply and demand dynamics. However, in a global market, no benchmark is truly isolated. WTI inevitably follows Brent's direction, though often with a lag and smaller magnitude, reflecting America's position as both a major producer and consumer.

The Brent-WTI spread itself becomes a market signal during Hormuz crises. When Brent rises faster than WTI, it indicates that the international market — particularly Asian buyers dependent on Gulf crude — is bearing the brunt of the disruption. This spread widened dramatically during the current crisis, at times exceeding $10 per barrel, compared to its historical average of $3-5. This divergence creates arbitrage opportunities but also signals the geographic unevenness of the crisis impact: American consumers face price increases, but Asian and European buyers face an existential supply challenge.