Iran Claims to Block the Strait of Hormuz! Global Oil and Gas Prices Surge, Central Banks Scramble: Is a Rate Hike Coming?

According to CCTV News, late on March 2 local time, a senior advisor to the commander of the Iranian Islamic Revolutionary Guard Corps stated that the Strait of Hormuz has been closed, and Iran will target all ships attempting to pass through the Strait. Currently, the Iranian Islamic Revolutionary Guard Corps has not issued an official statement.

Meanwhile, following an attack on Qatar Energy’s natural gas facilities, European natural gas prices surged over 40%, and the potential resurgence of inflation could complicate central bank policy decisions worldwide.

Oil and Gas Prices Rise

After the third round of US-Iran nuclear talks ended without agreement, U.S. and Israeli forces launched intensive strikes against Iranian leadership and military targets last weekend. In response, Iran carried out retaliatory attacks on military and civilian targets of the U.S. and Israel in the UAE and other neighboring countries. Two major international crude oil futures jumped over 10% in early trading, breaking through the $80 key level. Olivier Hansen, head of commodities strategy at Saxo Bank, said, “The attack by the U.S. and Israel on Iran, followed by Iran’s counterattack, is one of the most serious threats to Middle Eastern energy supplies in years.”

The biggest risk to the global oil market is the potential attack on key regional oil facilities or the long-term disruption of shipping through the Strait of Hormuz—about one-fifth of the world’s oil is transported through this narrow waterway. Approximately 20 million barrels of crude oil and refined products pass through the strait daily. Even a brief shipping delay could significantly impact global supply chains.

Market observers note that after the IRGC warned ships not to pass through the strait, oil tanker traffic has largely stalled, with many ships turning back, rerouting, or anchoring nearby. Reports of attacks on several ships, along with rapidly rising war risk insurance premiums, increased insurance costs, and termination notices from insurers, have further shaken market confidence.

Navigation and tracking systems in the wider region are also increasingly affected by electronic interference, raising the risk of accidents. Jorge Leon, head of geopolitical analysis at Rystad Energy, warned, “The situation this weekend shows that once security alerts, insurance costs, and interference factors combine, a ‘clear’ strait could quickly become effectively restricted.”

Although Saudi Arabia and the UAE have pipelines bypassing the Strait of Hormuz, a complete closure of the strait would still prevent these pipelines from fully compensating for the loss of transit capacity. Goldman Sachs estimates that, according to IEA data, existing backup pipelines can divert up to 4.2 million barrels per day, meaning about 16 million barrels of oil transported daily are at risk.

Jorge Leon also stated, “The most direct and tangible impact on the oil market is that shipping through the Strait of Hormuz has effectively stalled. This is mainly due to precautionary measures taken by shipping and insurance companies after the escalation, rather than Iran’s actual blockade.”

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Olivier Hansen, chief investment strategist at Saxo Bank, said, “This price increase could be more sustained than typical market reactions because the entire Middle East region is embroiled in conflict. The market is not only pricing in the oil itself but also the transportation costs. Even if the strait isn’t fully closed, rising war risk premiums, rerouted routes, and re-priced insurance will keep oil and freight costs high.”

Analysts note that Iran has long viewed the Strait of Hormuz as a strategic leverage point, but it is unlikely to fully blockade the strait long-term, as Iran’s own oil exports and extensive trade rely on this route. Naven Dast, senior crude analyst at Kpler, said, “Although called a ‘final disruption,’ this posture reveals a key contradiction. Unlike Saudi Arabia and the UAE, which have alternative pipelines, Iran’s Gorkh-Jask pipeline has very low utilization, and Tehran almost entirely depends on the Strait of Hormuz for exports.”

Beyond oil, the disruption of the strait also threatens liquefied natural gas (LNG) shipments, mainly from Qatar, the world’s second-largest LNG exporter. After drone attacks on Qatar Energy’s Ras Laffan and Mesaieed LNG complexes, production at these facilities has been halted. These projects supply about 20% of global LNG.

Qatar’s supply suspension threatens about 15% of EU LNG imports, further tightening the already strained global LNG market and increasing competition for U.S. sources. In addition to targeted attacks on LNG facilities, LNG carrier operators have paused shipments through the Strait of Hormuz, limiting supplies from other major Middle Eastern natural gas producers. Currently, EU gas inventories are relatively low, below 31%, compared to 40% last year, further amplifying supply risks. As a result, European natural gas futures, including Dutch TTF and UK gas, surged over 50% in late trading.

Central Banks Face New Challenges

The resurgence of Middle Eastern conflict presents new difficulties for central banks worldwide. The surge in energy prices recalls the pain of 2022, when the Russia-Ukraine conflict pushed up commodity prices, fueling inflation and forcing aggressive rate hikes.

Disruptions in energy transportation through the Strait of Hormuz could severely impact Asia. Moody’s economist Stefan Anrik said, “Asia is particularly vulnerable because it purchases the majority of Middle Eastern oil and natural gas.” Most crude oil passing through the strait is destined for China, India, South Korea, and other countries. Anrik added, “Developed economies like Japan and Singapore, which are highly dependent on imports for energy and food, will feel the immediate impact of price fluctuations.”

If rising commodity prices feed into consumer inflation and producer costs, central banks may have to halt rate cuts or even consider hikes. OCBC economist Raghavan Venkateswaran said, “The tendency toward monetary easing will be tested. However, subsidy policies can buffer inflation shocks, and the relatively moderate inflation pressures expected in 2025 provide a more relaxed starting point for 2026.”

But fiscal buffers vary across countries, and in economies with weak consumption and rising living costs, raising interest rates is politically difficult. Rising prices could also weaken currencies. Anrik noted that higher commodity prices and increased import costs could worsen trade balances and negatively impact local currencies.

Mitsubishi UFJ Bank predicts that renewed global inflation will worsen trade conditions for Asian oil-importing countries. They expect the oil shock to cause Asian currencies like the won, rupee, peso, and baht to weaken, as they are more sensitive to energy import costs. While the duration of the conflict remains uncertain, central banks are already on alert. Indonesia and Singapore both said on Monday they are closely monitoring financial markets. An Indonesian official stated that intervention would be made if necessary to maintain the rupiah’s exchange rate and economic fundamentals, with active intervention. The Monetary Authority of Singapore is assessing the impact of the conflict on the local economy and financial system. Trade officials warn that sustained high energy prices could raise costs for businesses and consumers, dragging down the global and Singaporean economies.

European natural gas futures rose, pushing the eurozone’s long-term inflation expectations indicator from last Friday’s 2.0806% to 2.1217%. Resurgent inflation could ultimately force the European Central Bank to adjust interest rates. Currency market data shows that the market’s probability of rate cuts by the ECB before year-end is about 21%, slightly below early trading levels.

Nomura’s senior European economist, Anjei Szczerbanik, said, “The ECB’s perspective is more focused on the medium to long term rather than short-term stress responses.” He noted that the ECB mainly considers the outlook for the next two to three years, and the impact of current oil price fluctuations will manifest before then. This week, markets will focus on the eurozone February inflation data to be released on Tuesday. Last week, German data showed that, dragged down by falling energy costs, the eurozone’s largest economy’s February inflation unexpectedly fell to 2%.

Over the past few months, the Federal Reserve has faced dual pressures: demands from the White House to cut rates and persistent inflation that’s hard to contain. The latest Middle East developments only add to these challenges. Since December, wholesale prices have accelerated, with an annualized growth rate reaching 3%, frustrating Fed officials who initially believed the tariffs imposed by Trump would only have a temporary impact on inflation. Former chief economist at BofA Securities, Ethan Harris, predicts that producer price increases are likely to quickly pass through to consumers.

Scott Anderson, chief US economist at BMO Capital Markets, also believes inflation is heating up in Q1. The January core PCE (Personal Consumption Expenditures) inflation rate could rise to 3.1%, a two-year high—before considering the effects of the Iran attacks and subsequent developments. The Fed’s inflation target is 2%. Anderson said that every $10 increase in oil prices could raise consumer inflation by 0.2% to 0.4% over the next year.

Christopher Granville, managing director at TS Lombard, a macroeconomic forecasting firm, said as long as Iran resists, the “oil storm risk” will persist, implying stubborn risk premiums in oil prices that support a decline driven by fundamentals. During the period when U.S. military power fully destroys Iran’s defenses, oil prices will continue to surge; however, Granville believes that this “all-out” response will prevent Iran from igniting a full-scale Gulf region conflict or triggering a 1970s-style oil crisis.