With the endgame of the war between the US and Iran remaining unclear, businesses and consumers are bracing for more tough times.
A prolonged shutdown of the Strait of Hormuz – potentially until September and even beyond – is likely to exacerbate the trade and energy turmoil that has disrupted the Gulf region.
Analysts, however, have noted a number of positives, such as the reconfiguring of supply chains to help ease bottlenecks, and continued government support for consumers.
"A closure past September becomes a structural reset of costs, suppliers and trade relationships," Dr John Katsos, a professor of management, strategy and entrepreneurship at the American University of Sharjah, told The National.
"Those are different problems than the current supply chain issues and require different responses. Most planning frameworks in the region were built for the former, not the latter."
Strait talk
The strait, a narrow channel in the Arabian Gulf though which more than 20 per cent of global crude oil supplies normally flow, has been effectively shut since the war began on February 28.
“Ships may remain stranded until an agreement is reached,” said Chris Newton, a senior analyst at the International Crisis Group. “Vessels stuck west of Hormuz when the war began have continued to trickle out, but there has been no big rush through the strait and that's unlikely without a durable agreement.”
Fears are growing that the strait could be closed for longer, perhaps until September, as the US and Iran have yet to reach an agreement to end the war, even as peace negotiations continue. Iran’s nuclear programme and the conflict in Lebanon also remain major obstacles.
This week, Iran attacked Kuwait International Airport, killing one person and injuring several others. This has increased fears that the war may intensify and lead to prolonged supply disruptions in the Gulf and other countries around the globe that depend on crude oil from the Middle East.
The latest Kpler data shows that only a few ships have passed through the Strait of Hormuz recently with US assistance. The majority of them – estimated at more than 400 – remain stuck in Gulf waters.
Shipping risks
Ship exits are expected to continue with or without US co-ordination or protection, and through Iran's arrangement involving the payment of tolls, but risks remain high due to potential attacks from Iran, analysts said.
“Some ships are transiting via the southern route close to the coast of Oman in co-ordination with and under an element of protection of the US military," said Jakob Larsen, chief safety and security officer at Bimco shipping association. "This is quite risky since it is done with lights and radars turned off and [with] the risk of attacks from Iran.
“Other ships transit via the route close to the Iranian coast and controlled by Iran. Using this route entails payment of transit fees to Iran in violation of US sanctions and also entails significant risks.”
Apart from the physical risk to ships, operational uncertainty is expected to grow: vessel schedules would become unreliable, cargoes would be delayed or rerouted, and ports outside the Gulf would become congested.
Shipping companies also face higher fuel consumption, longer voyage times, increased working capital requirements and potential contractual disputes.
War-risk premiums are likely to remain elevated as insurers reassess exposure across the Gulf, while ship owners could demand higher compensation for operating in affected areas.
“Charter rates would increase as effective vessel supply tightens due to longer routes, waiting times and network disruption,” said Paolo Carlomagno, a partner at consultancy Arthur D Little.
Short-term container shipping freight rates have already risen around the globe during the strait's blockade and are expected to remain high this month, according to freight pricing platform Xeneta.
Compared to the pre-conflict period, average spot shipping freight rates in June are expected to be 75 per cent higher from China to the US East Coast and 51 per cent higher to Northern Europe. Rates are also projected to remain elevated to the Mediterranean and from Northern Europe to the US East Coast. The cost of moving goods worldwide is also expected to become costlier.
“The result will be a more expensive and less predictable global trade,” Mr Carlomagno said.
However, he said, trade would not stop and would be “significantly reconfigured” as shipping lines, cargo owners and governments would look for ways to keep cargo moving through a combination of naval protection, rerouting and alternative logistics corridors.
“The longer a closure persists, the more flows would shift toward alternative hubs such as Khorfakkan, Jeddah Islamic Port and King Abdullah Port, while governments accelerate the use of land bridges and strategic storage,” he said.
Middle East countries have unveiled new trade corridors following the closure of the strait, with the Oman-UAE route becoming significant for the transport of essential goods such as food and medicine, as well as industrial equipment.
Saudi Arabia is positioning Neom as a logistics hub, with the development of a trade corridor connecting European and Gulf markets that bypasses the Strait of Hormuz.
The new routes are in addition to crude-oil pipelines that the UAE and Saudi Arabia operate to export oil. Iraq is exporting goods through a pipeline and by lorry to Syrian terminals for shipment to global markets.
For products such as liquefied natural gas, however, there are very limited alternatives, making them the most exposed segment.
Energy sector
Global energy markets are expected to face a shortage of supplies as a result of a prolonged closure of the strait. Brent has shot up by nearly 31 per cent since the start of the war.
“Energy importers, particularly in the Global South without major energy reserves, are going to experience a shortage of supply most acutely and in many ways already are,” said Ryan Bohl, senior Middle East and North Africa analyst at Rane Network.
“Other advanced economies like Europe, with fewer options besides Middle Eastern oil, will also experience it more thoroughly.”
The US, the world’s largest economy, is comparatively insulated thanks to its large Strategic Petroleum Reserve as well as its own significant production capacity.
“Countries most close to the Middle Eastern energy supply chain are already feeling the effects and those less exposed, like the US will take longer before we would see an acute energy crisis,” Mr Bohl said.
Countries such as India, which relies heavily on the Middle East for crude, have already increased petrol prices amid crude shortages.
$150 per barrel possible
Analysts have also cautioned that Brent could hit $150 per barrel if supply disruptions persist.
“If the Strait of Hormuz remains effectively closed until September, the market could face a severe disruption, with around 12 million barrels per day of export supply at risk,” said Abhishek Kumar, a senior oil analyst at Sparta.
Measures such as strategic reserve releases, increased flows from the US and waivers of sanctions on Russian crude have provided some cushioning. But the longer the closure lasts, the more the issue shifts from a geopolitical risk premium to a real physical supply problem, he added.
This week, the International Monetary Fund warned that global oil inventories are expected to sink to a five-year low next month as the Iran war affects energy supplies.
Availability of the right crude grades, especially medium and sour Middle Eastern barrels for refining, will also be in question if the disruption lasts.
“This would intensify competition for Atlantic Basin and non-Gulf barrels, and could eventually force refinery run cuts in the most exposed markets, or even trigger demand destruction if prices remain elevated for long enough,” Mr Kumar said.
Gulf economies better positioned
Economic challenges are projected to rise for Gulf countries, and a longer closure of the strait would force the GCC to move from managing a temporary supply shock to addressing a more sustained economic challenge, said Oliver Cornock, editor-in-chief of Oxford Business Group.
The good news, however, is that the region is “better positioned than most to absorb such shocks", he told The National.
"Strong sovereign wealth reserves, prudent fiscal management and the inherent agility that many Gulf economies have demonstrated in recent years provide important buffers”, he said.
“As a result, the focus would increasingly shift from short-term crisis management to longer-term adaptation, with governments and businesses adjusting strategies to maintain economic momentum and resilience.”
Earlier this year, the International Monetary Fund lowered the growth forecast for Gulf countries amid the war, with Saudi Arabia and the UAE, the Arab world’s two largest economies, forecast to grow by 3.1 per cent each in 2026.
Qatar, Bahrain and Kuwait are projected to contract by 8.6 per cent, 0.5 per cent and 0.6 per cent respectively, while Oman, largely unaffected, would expand by 3.5 per cent.
“Gulf governments will generally see an impact on their national budgets from lower energy outflows but there will be exceptions like Saudi Arabia and Oman, which are enjoying a boost in revenue due to higher demand,” Mr Bohl said, adding countries such as Kuwait will suffer the most.
Inflation is also expected to rise, particularly for imported goods, but at the same time may be “moderated by a combination of government measures designed to control prices as well as subdued demand”, he added.
Consumer angle
Consumers are among those feeling the heat most, particularly with prices at fuel pumps shooting up.
However, the UAE has kept a lid on consumer costs spiralling out of control, with authorities ordering price freezes on some everyday goods.
"Government subsidies and price controls are absorbing significant pressure right now. Without them, the consumer picture would have looked considerably worse," Dr Katsos said.
He noted that the initial shock triggered panic-buying and stockpiling, which temporarily inflated demand figures for some products.
But by April, the stockpile effect unwound and retail sales and wholesale volumes dropped.
"That gap between headline stability and the real demand signal is exactly what makes planning so difficult right now," Dr Katsos said.
"For regular consumers, the behavioural shift is already visible: trading down to cheaper options and reducing overall spending and purchasing frequency."
