The chokepoint

The Strait of Hormuz is 21 miles wide at its narrowest point. Through it passes approximately 20% of the world's daily oil supply and a significant portion of global LNG trade, primarily from Qatar.^[4] For decades, the strait's status as a chokepoint has been treated in market models the way earthquake risk is treated in California real estate: acknowledged, priced in theory, and functionally ignored in practice.

The reason it was functionally ignored is that closing Hormuz has always been understood as a mutually assured economic destruction scenario. Iran needs the strait open to export its own oil. Saudi Arabia, the UAE, Kuwait, Iraq, and Qatar all need it open for their exports. The theory was that nobody — not even the most ideologically committed actor — would shut down the mechanism by which they pay their bills.

The theory was correct, strictly speaking. Iran didn't close Hormuz. The insurance market did.

The insurance kill switch

Here's how Hormuz went from "open chokepoint" to "effectively closed" in approximately 72 hours.

On February 28, the US and Israel struck Iran. Iran retaliated with drones and missiles targeting the UAE, Saudi Arabia, and US installations across the Gulf. On March 1, the major Protection and Indemnity clubs — Gard, Skuld, NorthStandard, London P&I Club, the American Club — issued 72-hour cancellation notices for war risk extensions covering vessels transiting the Persian Gulf and adjacent waters.^[10]

Effective midnight London time on March 5, 2026, any vessel entering the Persian Gulf, the Strait of Hormuz, or specified adjacent waters would lose its war risk coverage. MS&AD Insurance Group in Japan suspended underwriting war risk products for the entire region. The cancellations cascaded upstream from reinsurers.

The mechanism is worth drawing carefully:

1. A tanker carrying crude oil needs P&I coverage (third-party liability) and hull and machinery insurance to trade.
2. War risk is an additional layer, covering damage from hostile acts.
3. Without war risk coverage, a tanker transiting a designated war zone is effectively uninsured against the most probable cause of loss.
4. A tanker owner who sends an uninsured vessel into a war zone is personally liable. The banks that financed the vessel will call their covenants.
5. So when P&I clubs cancel war risk, the tanker doesn't need to be sunk. It doesn't need to be threatened. It simply cannot go. The insurance cancellation is the blockade.

Within 24 hours of the initial strikes, traffic through the Strait of Hormuz declined by approximately 80%. Over 150 ships anchored outside the strait, waiting.^[2] By March 3, transits had fallen to effectively zero.

Nobody mined the strait. Nobody deployed a naval blockade. Seven insurance companies in London and Oslo sent letters, and 20% of the world's oil supply stopped moving.

The price discovery

What does it cost when the world's most important chokepoint closes?

Start with tanker rates. The VLCC spot rate from the Middle East to China hit $423,736 per day — an all-time record, up 94% from the prior Friday.^[1] War risk premiums, which had been running around 0.2% of vessel value, surged to approximately 1%. For a VLCC worth $100-120 million, that's an increase from roughly $200,000 to $1 million per transit — on top of the spot rate.

Then LNG. Qatar is the world's largest LNG exporter, accounting for approximately 20% of global supply. All of Qatar's LNG passes through Hormuz. When the transits stopped, so did 20% of the world's liquefied natural gas.^[5]

The JKM — the Japan Korea Marker, which is the Asian LNG benchmark — rose 68.5% to $25.39 per million British thermal units.^[6] The TTF, the European benchmark, rose 76% on the week.^[7] Brent crude climbed 10-13% in initial trading, with analyst projections of $100 per barrel if the disruption persisted beyond two weeks.^[11]

These are not normal price moves. These are the market discovering, in real time, that a risk it had been modeling as a tail event was actually happening.

The storage question

If Hormuz is closed, the relevant question for every importing nation becomes: how many days can we last?

JPMorgan estimated that the GCC countries — the ones with oil stuck on the wrong side of the strait — had approximately 25 days of strategic storage available.^[3] This is not the same as 25 days of exports; it's 25 days of domestic consumption that can be met without new production reaching export terminals.

For importers, the numbers are different. The US Strategic Petroleum Reserve held approximately 415 million barrels as of late February 2026 — enough to cover roughly 63 days of total US petroleum imports at current rates, though the US imports relatively little from the Gulf directly.^[8] Japan and South Korea maintain strategic reserves equivalent to roughly 90 days of imports, per IEA requirements. China's strategic petroleum reserve is less transparent but estimated at 40-50 days.

Here's the structural point: "days of storage" has become a tradeable variable. Not literally — there is no days-of-storage futures contract (yet) — but functionally. Every commodity trading desk in the world is now running scenarios with Hormuz closure duration as the independent variable and storage drawdown rates as the dependent variable.

The pricing logic:

1. If Hormuz reopens in 1-3 days: a premium, a spike, a reversal. Noise.
2. If Hormuz stays closed for 1-2 weeks: storage draws accelerate, secondary routes (pipelines, Red Sea) are overwhelmed, regional supply disruptions become real. Brent $95-105.
3. If Hormuz stays closed for 3-4 weeks: GCC storage depletes, Asian LNG markets enter rationing, industrial shutdowns begin in countries dependent on Gulf supply. Brent $110-130. JKM exceeds the 2022 European gas crisis peaks.
4. Beyond a month: we're in territory nobody has modeled because nobody thought they'd have to.

The market is currently pricing somewhere between scenarios 2 and 3 — hedging for a two-week disruption but not yet pricing full structural breakdown. Whether that's correct depends entirely on two things: when the shooting stops, and when the insurance companies send new letters.

The bypass routes

The obvious question: can you route around Hormuz?

Saudi Arabia has the East-West Pipeline (Petroline), which can move approximately 5 million barrels per day from the Eastern Province to the Red Sea port of Yanbu, bypassing Hormuz entirely.^[12] In theory, this means Saudi Arabia can maintain a significant portion of its exports even with the strait closed. In practice, the pipeline was running at reduced capacity because, for the past decade, nobody needed the bypass. Ramping to full capacity takes time — estimates range from 48 hours to two weeks, depending on maintenance status.

The UAE has the Habshan-Fujairah pipeline, which can move about 1.5 million barrels per day to the port of Fujairah on the Gulf of Oman, outside the strait. Abu Dhabi has been using this intermittently for years.

Iraq can route some exports through Turkey via the Kirkuk-Ceyhan pipeline, though that line has its own geopolitical complications and capacity constraints.

Qatar has no pipeline bypass. Its LNG has no alternative route. This is the single most consequential supply vulnerability exposed by the current crisis: the world's largest LNG exporter is entirely dependent on a 21-mile strait for its entire business model.

Total bypass capacity: roughly 6.5-7 million barrels per day of crude, if everything works perfectly. Normal Hormuz oil transit: approximately 20 million barrels per day. The bypass covers about a third of the flow. The other two-thirds either stays in the ground, goes into storage, or doesn't move.

The DFC intervention

On March 3, President Trump announced that the United States would "provide insurance for ships in the Gulf."^[9]

The mechanism here is novel, and I'm not sure anyone has fully worked it out. The apparent concept: the US Development Finance Corporation (DFC) or a similar government entity would backstop war risk insurance for commercial vessels transiting the Gulf, effectively replacing the private P&I market with a sovereign guarantee.

If you were structuring this as a term sheet:

Insurer: The United States government, via DFC or Treasury. Insured: Commercial tanker operators willing to transit Hormuz. Coverage: War risk — damage from hostile acts, including drone strikes, missile attacks, and mine damage. Premium: Unclear. Possibly zero (a subsidy to keep oil flowing) or at market rates (in which case, why would it be cheaper than private insurance?). Trigger: Damage to an insured vessel in the covered zone. Payout: Repair or replacement cost, plus liability. Residual risk: The US government is now the insurer of last resort for the world's most important oil chokepoint. If a VLCC gets sunk, the US taxpayer pays.

One way to read this: a bold, necessary intervention to prevent a global energy crisis caused by insurance market dynamics rather than military action. Another way: the US government is subsidizing the oil trade to mitigate the economic consequences of a war it started.

In any case, it's a remarkable admission. The private insurance market — seven companies, maybe a dozen underwriters — turned out to have more control over global oil flows than the US Fifth Fleet. The government's response was not to secure the strait militarily (which it arguably could) but to replace the insurance function that the private market withdrew.

The insurance market closed Hormuz. The US government is trying to reopen it by becoming the insurance market.

Hm.

What "days of storage" means

Let me try to draw the bigger picture.

For the past 50 years, energy security has been discussed primarily in terms of supply: barrels per day, pipeline capacity, refinery throughput. The Hormuz crisis has introduced a different unit of analysis: time.

"Days of storage" is not a supply metric. It's a duration metric. It asks: given current consumption, how long can you last without new supply? And the answer is different for every country, every commodity, and every season.

This changes the hedging calculus. Before the crisis, a company hedging Gulf supply risk would buy call options on Brent or book alternative supply contracts. Now, the relevant hedge isn't a price hedge — it's a duration hedge. How many days of disruption can you survive? That depends on your inventory, your contractual flexibility, your ability to switch fuels, and your geographic diversification.

The countries that took strategic storage seriously — the US, Japan, South Korea, and to a lesser extent China — are in a structurally different position from those that didn't. The countries that assumed Hormuz would always be open — which is to say, everyone who built their energy infrastructure around Gulf supply without adequate alternatives — are discovering that their "just-in-time" approach to energy security has the same vulnerability as just-in-time manufacturing: it works perfectly until it doesn't, and when it doesn't, there's no buffer.

Straightforward.

---

Things happen

Approximately 20.5 million barrels per day transited Hormuz in 2025. Qatar's LNG export capacity is roughly 77 million tonnes per year, with a further 49 million tonnes under construction. The IEA's coordinated emergency response mechanism has been activated twice in its history — during the Gulf War and the Libyan civil war. Japan imports roughly 90% of its oil from the Middle East. South Korea imports about 70%. India imports approximately 60%. China imports about 40% from the Gulf, though it has been diversifying toward Russia. The insurance industry term for Hormuz-type risk is "accumulation risk" — the concentration of insured values in a single geographic zone. The last time Hormuz was seriously threatened was 1988, during the Iran-Iraq War's Tanker War phase. The Suez Canal, the world's second most important maritime chokepoint, handles about 12% of global trade. Fujairah's oil storage capacity is approximately 60 million barrels.