Middle East Conflict Pushes Strait of Hormuz to Brink of Closure
The ongoing crisis in the Middle East has brought maritime traffic through the critical Strait of Hormuz nearly to a complete halt, severely disrupting global oil supplies and forcing major Gulf nations to implement drastic production cuts. With storage tanks filling rapidly across the region, analysts are warning of an imminent risk of total production shutdowns if output is not managed carefully.
Major Gulf Producers Implement Significant Output Reductions
Saudi Arabia, the world's largest oil exporter, has reduced production by between 2 million and 2.5 million barrels per day. The kingdom is attempting to reroute some supplies through the Red Sea to maintain export levels, although the pipeline capacity there cannot fully accommodate the usual volumes. According to sources cited by Bloomberg, this strategic shift represents a significant operational challenge for the Saudi energy sector.
The United Arab Emirates has also lowered output substantially, cutting between 500,000 and 800,000 barrels daily. Similar to Saudi Arabia, the UAE is redirecting some exports through the port of Fujairah, which has itself been targeted by Iranian strikes. While this alternative route helps maintain some shipment continuity, it covers only a fraction of the Gulf's typical export capacity.
Kuwait Petroleum Corporation began cutting oil output last week and declared force majeure on certain contracts. The company stated the reduction was precautionary and would be reviewed as the situation develops, while emphasizing readiness to restore production when conditions allow. Prior to these cuts, Kuwait was producing approximately 2.6 million barrels per day of crude oil in February.
Iraq Faces Critical Production Crisis
Iraqi oil production from its main southern fields has plummeted by 70%, dropping to just 1.3 million barrels per day from a pre-war level of 4.3 million barrels daily. Exports have fallen even more dramatically to an average of around 800,000 barrels per day, with only two tankers loading recently due to restricted vessel movement through the Strait of Hormuz.
With Iraq's storage capacity likely exhausted, the country implemented output cuts of approximately 1.5 million barrels per day last week. Rystad Energy has issued a stark warning that Iraq's remaining operational oil fields "face an imminent, near-certain shutdown" if current conditions persist.
Natural Gas Supply Disruption Hits Global Markets
Qatar, India's largest supplier of imported natural gas, declared force majeure on LNG deliveries following a production halt after an Iranian drone strike. Sources indicate this disruption has reduced supplies to Indian industry by up to 40%, affecting multiple sectors including power generation, fertilizer production, CNG distribution, and piped cooking gas networks.
Gas importer Petronet LNG Ltd has informed gas marketers of Qatar's production suspension, which came after Iran continued strikes against Gulf countries in retaliation for Israeli and US military actions.
Global Oil Prices Surge Amid Supply Concerns
The conflict has pushed oil prices to nearly $120 per barrel following Israel's strikes on Iran's energy infrastructure and Tehran's announcement of Mojtaba Khamenei as Iran's new Supreme Leader. Brent crude reached $119.50 earlier this week before easing to around $100 per barrel, still representing an increase of over 20% compared to pre-war levels.
The war has created fresh concerns about energy infrastructure security across the Middle East, with producers already grappling with damaged sites from Iranian attacks and the effective closure of the Strait of Hormuz, which typically carries roughly one-fifth of global oil and LNG flows.
Storage Capacity Crisis Looms for Gulf Nations
With storage tanks nearing maximum capacity across the region, Gulf oil-producing nations face the growing risk of complete production halts. JP Morgan estimates that collectively, Gulf nations can store approximately 343 million barrels of oil to delay inevitable production stoppages. However, with around 15 million barrels per day of crude and over 4 million barrels per day of refined products typically flowing through the Strait of Hormuz, these storage buffers are extremely limited.
Iraq, which had just six days of storage capacity, has likely already reached its limit, prompting Baghdad's significant output reductions. In contrast, Saudi Arabia had 66 days of storage as of February 28, assuming the kingdom could successfully reroute exports through alternative pathways. Despite this advantage, Rystad Energy cautions that the Saudis may have only seven to nine days of "effective runway before forced output cuts" become necessary.
Alternative Routes Offer Limited Relief
Saudi Aramco is redirecting as much oil as possible to the Red Sea port of Yanbu, while the UAE is sending some exports through Fujairah despite that port also being targeted by Iranian strikes. These alternative routes currently handle only about one-third of the volume that normally passes through the Strait of Hormuz, providing insufficient capacity to offset the disruption.
Bloomberg News reports that production cuts across the region now total approximately 6.7 million barrels per day when combining reductions from Saudi Arabia (up to 2.5 million), UAE (500,000-800,000), Kuwait (500,000), and Iraq (roughly 2.9 million). This substantial reduction in global supply has created unprecedented challenges for energy markets worldwide.
