We explored last week how conflict and geopolitical tensions in the Middle East can impact the oil price, and wider inflation. One client followed up with a pointed question: what happens if Iran blocks the Strait of Hormuz?

It’s a fair question. Each day an average of approximately 20m barrels of oil pass through this narrow maritime corridor between Iran and Oman. That’s equivalent to about a fifth of the oil the world uses every day. It’s the most significant potential chokepoint for global oil supplies, with more volume passing through it than the Suez Canal and Panama Canal combined.

As you’d expect, most of the oil travelling through the Strait originates from Saudi Arabia, Iraq, Kuwait, the United Arab Emirates and Iran. But where it ends up is probably more significant. Over 80% of these oil flows are bound for Asia, with China, India, South Korea and Japan being the largest buyers.

So, if Iran were to try and close the Strait, who would be hurt most? Although the US might feel compelled to intervene – diplomatically or militarily – the economic pain of an Iranian blockade is likely to be felt most acutely by the East, not the West.

And what about Iranian oil? US sanctions restrict sales of Iranian oil and, as a consequence, nearly 90% of its crude exports now go to China, with another 6% to Syria.

Still, even the threat of a blockade can move markets. The oil price is influenced by perception as much as production. Traders don’t need to see a full shutdown – just the possibility of one is enough to send prices higher.

And yet, here’s the kicker: The biggest oil producer in the world isn’t Saudi Arabia – it’s the US, now accounting for 20% of global oil output, outpacing both Saudi Arabia and Russia at 12% each. Add in that the US is also the largest exporter of liquefied natural gas, and you start to see why America’s energy independence narrative has real teeth.

‍Key takeaway

As US investor Howard Marks puts it, “Markets are inherently unpredictable, but that unpredictability is itself predictable.” It’s not about knowing what will happen next –it’s about recognising that surprises are part of the journey.

That’s why we focus on diversification. Different assets can perform different roles in our portfolios. For, example, UK equities offer relatively high exposure to energy companies. In times of geopolitical tension, that exposure can potentially act as a hedge to help protect portfolios.

You can’t predict the future. But you can prepare.

‍

Find out more about our multi-asset solution

‍

This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.