NICHOLAS TURNBULL | Why this oil shock may be different

For the first time in modern history the Strait of Hormuz, the most critical artery in the global energy system, has in effect been taken offline at scale. Not legally closed, but operationally disabled in a way markets have never previously had to price.

Oil markets have endured many shocks over the past half century. Embargoes, revolutions, wars and high-stake geopolitical negotiations have all driven sharp price moves and unsettling headlines. What distinguishes the current episode is not simply the degree of volatility, but the nature of the disruption itself.

Historically, oil shocks have originated from upstream supply decisions or production failures, not from the breakdown of the transport mechanism that connects producers to the world. A look back on previous oil crises illustrates this:

• 1973-74: Arab oil embargo. This shock was more political in nature. Exporting nations chose to restrict supply in response to geopolitical events, but oil continued to flow through Hormuz. The constraint was imposed at the source, removing roughly 7% of global supply — significant but operationally contained.
• 1978-79: Iranian revolution. Supply fell sharply as Iranian production collapsed amid domestic upheaval. Prices surged and inflation followed, but once again the Strait remained open. This was a production shock, caused by a political incident, not a chokepoint failure.
• 1980s: The Iran-Iraq “tanker war”. This episode is the closest historical parallel to the present situation. Tankers were attacked, mines were laid and insurance costs rose sharply. Yet shipping continued, often under naval escort. While the strait was dangerous, it was never completely shuttered.
• 1990-91: Gulf War. Iraqi exports were removed almost overnight. Prices surged, but other Gulf producers responded by increasing output and spare capacity absorbed much of the shock. Throughout the conflict Hormuz remained functional and the system adjusted and absorbed the supply change.
• Post-2000 threats (2008, 2012, 2019). Several threats from Iran to close the strait led to brief risk repricing and oil spikes. Each time shipping continued and the threat faded without incident.

Across all the episodes, one feature was constant: the plumbing of the global oil market kept working. The current disruption represents a potential structural break rather than a replay of familiar history. For the first time, the Strait of Hormuz has been functionally removed from service, even if no formal closure has been declared.

Tanker traffic has all but come to a standstill, and commercial shipping through the strait has slowed to a trickle as insurers withdraw cover, shipowners refuse transit and crews invoke war risk clauses. In practical terms this is equivalent to closure for much of the market. In previous crises tankers sailed, sometimes nervously or sometimes under escort. As of today, most choose not to set sail at all.

The scale of supply at risk is unprecedented. About 20% of global oil supply, along with a material share of liquefied natural gas (LNG) exports, normally transits Hormuz. That is more than double the scale of any prior oil shock. Independent research groups have characterised this as the largest oil supply disruption on record, not because every barrel has disappeared but because access to them has been simultaneously lost.

There is no meaningful spare capacity buffer. In prior shocks, spare capacity elsewhere in the system helped stabilise markets. Today, spare capacity is limited and largely stranded behind the same bottleneck. Producers willing and able to increase output cannot easily move barrels if tankers cannot transit. This materially reduces the market’s ability to self-correct.

The bottleneck itself is the target. Previous shocks removed supply by damaging fields, toppling governments or imposing embargoes. This one disables the artery, not only the organ. Energy systems can often absorb the loss of a producer. They struggle far more when the transport mechanism fails. Disabling Hormuz affects the entire Gulf simultaneously.

There is no meaningful spare capacity buffer. In prior shocks, spare capacity elsewhere in the system helped stabilise markets. Today, spare capacity is limited and largely stranded behind the same bottleneck. Producers willing and able to increase output cannot easily move barrels if tankers cannot transit. This materially reduces the market’s ability to self-correct.

The risk is systemic, not cyclical. The International Energy Agency (IEA) and other leading energy bodies have described the scenario as a systemic risk to the global energy system. Once a chokepoint is shown to be vulnerable, the risk does not simply evaporate when political rhetoric softens or ceasefire discussions begin. Insurance costs, shipping behaviour and risk premiums tend to reprice permanently. The genie does not go neatly back into the bottle.

Equity markets are well practised at absorbing policy shocks. They are far less comfortable with physical constraints. The sharp oscillations in oil prices, spiking on disruption headlines and retreating on hopeful commentary, suggest investors remain anchored to historical playbooks that assume oil shocks are temporary, political and ultimately reversible. This one may not be. That does not mean alarm is warranted. It does mean complacency could be misplaced.

Our focus remains on signals rather than headlines. With no shortage of noise present, the signals that matter most are physical shipping data — evidence that insurers, shipowners and crews are genuinely willing to resume large-scale transit through the Strait of Hormuz — alongside inventory drawdowns, which will indicate how quickly global oil and refined product stocks are depleted if disruption persists.

Policy responses, co-ordinated releases from strategic reserves and the limits of their effectiveness where transport constraints remain unresolved will offer only partial relief. Second-round effects on inflation, consumer confidence and ultimately earnings expectations will take time to emerge. Most telling will be market behaviour itself: whether risk assets continue to treat this as a temporary scare or begin pricing a more persistent energy shock.

Periods like this are uncomfortable by design. They force repricing, challenge assumptions and test portfolio discipline. They also tend to create opportunity for investors willing to separate genuine volatility from permanent impairment.

Markets have navigated oil scares before. What they have not navigated is a sustained, large-scale disruption to the world’s most important energy chokepoint. That difference deserves attention — not fear, but a level of respect.

• Turnbull is a portfolio manager at WealthStrat.