Energy markets are in for a huge shock: oil prices topped $100 a barrel on Monday as the war in the Middle East causes the biggest supply disruption in history.
Brent futures rose as much as 27.8 percent to $119 a barrel, while U.S. West Texas Intermediate (WTI) crude rose about 30 percent to $118.
This increase comes after the dramatic escalation of the crisis in the Persian Gulf and the suspension of production by the major producers in the region – Kuwait, Iran and the United Arab Emirates – due to the situation in the Strait of Hormuz.
Hormuz, at the epicenter of the crisis
The Strait of Hormuz is one of the most important energy corridors on the planet.
About a fifth of the world's oil and liquefied natural gas reserves pass through the narrow passage, only 32 kilometers wide at its narrowest point.
Tensions in the region have led to a dramatic slowdown in shipping. More than 1,000 ships are reportedly waiting to pass, while several shipowners avoid sending oil tankers to the region because of the risks posed by missiles, drones and ship attacks.
“What's happening today is not just the worst possible scenario. It's something that was previously unthinkable,” says JPMorgan analyst Natasha Kaneva.
Even without a formal blockade, the threat of attacks effectively froze much shipping.
The situation is compounded by the fact that two of the main market “regulators”, Saudi Arabia and the United Arab Emirates are no longer supplying to international markets due to the situation in the Persian Gulf.
The effects are already visible in production.
Iraq, which cannot easily export its oil, has been forced to cut production by more than two-thirds as storage tanks fill up.
Kuwait is facing similar problems, while Abu Dhabi's National Oil Company has announced it is slowing production to avoid overstraining storage facilities.
If the Strait of Hormuz remains closed for several days, production in the region could drop by more than 4 million barrels per day. By the end of the month, the loss could reach 9 million barrels per day, an amount equivalent to about 10% of global demand.
Market shock
The energy shock has already spread to stock markets, with Asian markets posting losses in the early hours of Monday.
Japan's Nikkei fell more than 6 percent, Seoul's Kospi lost more than 8 percent, while other Asian markets from Hong Kong to Australia also saw significant losses.
Shares of technology and semiconductor companies have come under heavy pressure as investors fear a prolonged crisis will hurt global growth.
At the same time, fuel prices are already rising in several countries.
Effects on the global economy
Energy historian Daniel Yergin warns that if the crisis lasts for weeks, the effects will be global, the Greek press writes
“This is the largest disruption in daily oil production in history,” he noted. “If it continues, it will cause chain reactions throughout the global economy.”
The impact will be particularly severe in Europe and Asia, which are heavily dependent on energy imports from the Persian Gulf.
“A small price to pay,” Trump says
Despite the explosive rise in prices, US President Donald Trump appeared to downplay the impact.
In a social media post, he called the price hike “a very small price” to pay for neutralizing the Iranian nuclear threat.
“Short-term increases in oil prices are a very small price to pay for the security and peace of the United States and the world,” he wrote.
However, markets fear that if the Strait of Hormuz is not opened soon, oil prices could rise further, triggering the biggest energy shock since the 1970s.
