With US-Iran talks last weekend having failed to reach an agreement, the Strait of Hormuz is now effectively closed to energy exports from the Gulf. Guinness Global Investors’ Portfolio Managers, Jonathan Waghorn and Will Riley, have shared their analysis with us on what this latest development means for investors attempting to assess impacts on global energy markets – and the mechanics at work.
A US-declared blockade on effectively all shipping has compounded what was already a severe disruption, halting the passage of around 20 million barrels per day (b/day) of oil and petroleum products through one of the world’s most critical energy chokepoints.
Since the outbreak of war, several steps have been taken to partially offset the loss of Hormuz.
In normal times, around 35 tankers pass through the Strait of Hormuz in each direction every day, carrying approximately 20 million b/day of oil and petroleum products and around 10-11 billion cubic feet per day of liquefied natural gas. Since fighting began, that has fallen to an average of about two vessels per day, most of them Iranian-flagged. Transits picked up modestly in early April, but that residual traffic is now threatened by the US blockade, which could take a further 1-2 million b/day of Iranian oil off the market.
Three overland routes can carry Gulf oil to export terminals without going through the Strait, though none has spare capacity on the scale needed: Saudi Arabia’s East-West pipeline, the UAE’s Fujairah pipeline and the Iraq-Turkey pipeline to Ceyhan. Across all three routes, we estimate total diversion capacity of around 4-5 million b/day.
A supply shock bigger than anything in living memory
Adding up the pipeline diversions, strategic releases and de-sanctioned barrels, we get to roughly 10 million b/day of supply that can be substituted or released. That still leaves a net shortfall of around 10 million b/day, potentially more once the US blockade is fully in effect. To put that in context, the supply shocks of the 1970s ran to 5-7 million b/day, and the market’s worst-case scenario during the 2022 Ukraine conflict was considerably smaller than what we are dealing with now.
This disruption will persist while the Strait is closed and, even after it reopens, it will take a further two to three months for the industry to return to normal. There is no way to balance the market without significant demand destruction.
Oil-importing countries are only now starting to feel the physical effects of the disruption. Gulf cargoes take roughly a month to reach their destinations, so the supply gap is arriving at refineries and distribution networks as we write. Inventories are providing some buffer, but prices need to rise enough to reduce consumption at scale.
The early signs of rationing are already visible. Asian refiners have started cutting processing runs and reducing petrochemical output. Air and road traffic are running below trend. These are the first indications that demand is starting to adjust.
Brent was around $110/bl on 7 April. Our analysis suggests that meaningful demand destruction starts at roughly $120/bl, a level at which the economic pain becomes severe enough to change behaviour at scale. If the Strait stays closed, the market will need prices well above that.
One way to frame the scale of the problem is to look at the global oil bill as a share of GDP. At our new 2026 base case of $90/bl Brent, oil spending would represent around 2.9% of world GDP. That is well below the 4-8% seen during the Middle East supply crises of the late 1970s, or the 5% reached at the peak of the 2008 commodity cycle.
For oil to have the kind of broad macroeconomic impact seen in those episodes, prices would probably need to get to around $150/bl, which would take the oil bill back towards 5% of world GDP.
What does this mean for energy equities?
Higher oil prices feed through to energy equities in two ways: they lift near-term earnings directly, and they push up the long-run price assumptions that underpin company valuations.
On the near-term earnings side, switching to $90/bl and $80/bl Brent for 2026 and 2027, respectively (against prior forecasts of $65/bl) increases earnings for the producing companies we hold by around 30-80%, with total fund earnings per share up around 65% in 2026.
That would bring the fund’s forward price-to-earnings ratio down to around 13x in 2026, against a long-run sector average of about 15x and an MSCI World PE of around 20x for the same year. If companies use the additional cash to pay down debt or buy back shares, we think this alone adds around 15-20% to individual share prices.
The longer-dated oil price has also moved. The five-year forward Brent price is up around $7/bl since the start of the year, from $65/bl to $72/bl at end-March, as the market prices in a more sustained Middle East risk premium. Based on our modelling, a $7/bl increase in the long-run oil price justifies around a further 20% uplift in energy equity valuations.
Putting both effects together, energy equity valuations today look consistent with a long-run Brent price of around $73/bl. We think $80/bl is a more realistic long-run assumption, being the price at which the industry can fund enough new supply and OPEC+ members can sustain their fiscal positions. If energy equities are priced at $80/bl for the long term, with 2026 and 2027 estimates unchanged, this would imply 20% upside in energy equities from current levels.
