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In the early hours of Sunday morning, the United States executed one of the most daring military operations in recent memory. Codenamed Operation Midnight Hammer, the strike targeted three of Iran's most fortified nuclear sites. Utilising B-2 Spirit stealth bombers and cruise missiles launched from naval assets in the region, the coordinated assault was designed to neutralise Iran's nuclear capabilities without drawing American troops into a broader war. With the damage done, the world waits in bated breath to see what the response will be from Iran. One of the potential responses touted is the closure of the Strait of Hormuz, cutting off ~20% of the world’s oil supply. ABSI this week focuses on the price of oil moving forward. 

Unsurprisingly, in response to the escalation to the conflict, financial markets responded swiftly. Oil prices surged in early trading, with Brent crude rising as much as 4% to touch US$80 per barrel. This followed a week in which oil had already jumped 7–11% on speculation of Israeli involvement in regional hostilities. The S&P 500 futures dipped modestly, while safe-haven assets such as gold and U.S. Treasury bonds experienced a rally. The ASX All Ords was surprisingly resilient on Monday, closing down just 0.40%, reflecting a measured response rather than panic.

Source: Trading Economics

It’s early days but investor sentiment appears to be operating on a narrow edge; pricing in elevated geopolitical risk, but not yet a full-blown energy shock. As long as the Strait of Hormuz remains open and Iranian retaliation remains constrained, markets are likely to avoid extreme dislocation.

Iranian officials were quick to condemn the attack, with threats of "proportionate retaliation" emerging from Tehran. While Iranian proxy forces in Syria and Iraq have launched isolated drone and missile strikes, the more pressing question is whether Iran will make good on its threat to close the Strait of Hormuz after Iran’s parliament voted to close the Strait, which has moved the decision into the hands of Iran’s Supreme Council. 

The Strait of Hormuz is arguably the most critical oil transit route in the world. Roughly 20% of the global oil supply and a similar portion of liquefied natural gas (LNG) exports pass through its narrow corridor daily. It is bordered by Iran to the north and the United Arab Emirates and Oman to the south. The shipping lanes within the strait are just 3km wide in each direction, leaving vessels vulnerable to military interference.

Source: Forbes

Any serious disruption would send shockwaves through the global economy. According to recent modelling from Goldman Sachs and Morgan Stanley, a temporary closure of the strait could push Brent prices past US$100 per barrel, with a worst-case scenario of prolonged disruption seeing oil spike to US$130 or even US$150. The natural gas market, especially in Europe and Asia, would also face significant supply shocks.

Historically, Tehran has never closed the Strait but has leveraged it as a geopolitical bargaining chip. In 2012 and again in 2019, amid rounds of Western sanctions, Iranian leaders threatened to block the passageway, though they never followed through. Moreover, despite the threats, closing the Strait of Hormuz remains highly unlikely for several reasons.

Legal Constraints

Under the United Nations Convention on the Law of the Sea (UNCLOS), the strait qualifies as an "international strait," granting commercial and military vessels the right of transit passage. Iran has signed but not ratified UNCLOS, yet closing the strait would still constitute a violation of international norms and invite condemnation or even military response.

Physical Limitations

Iran possesses the military capability to disrupt traffic temporarily, through mining, missile launches, or harassment by fast-attack boats, but not to sustain a blockade. The U.S. Navy's Fifth Fleet, stationed in Bahrain, is well-equipped to neutralise such threats and has rehearsed precisely this scenario for years. Any closure attempt would likely be undone within days.

Geopolitical Blowback

Crucially, closing the strait would enrage Iran's regional neighbours. Countries like Saudi Arabia, Iraq, the UAE, Kuwait, and Qatar all rely heavily on the strait for the export of their own commodities. Even Qatar, which maintains relatively cordial relations with Tehran, would be economically harmed. A blockade would isolate Iran further and potentially galvanize a multilateral military response, undermining any strategic gains.

While Midnight Hammer marks a dramatic escalation in the U.S.-Iran tensions, markets have so far shown resilience, pricing in risk without veering into crisis mode. The potential closure of the Strait of Hormuz remains the key wildcard. Should that line be crossed, oil prices could surge into triple digits, igniting inflation and testing global central banks. 

But for now, the consensus among analysts, traders, and policymakers is that Iran will continue its pattern of aggressive posturing without triggering all-out economic warfare. The Strait of Hormuz, for all its strategic allure, is simply too important to close.

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