Iran’s Kuwait Strike Exposes Hormuz Bottleneck as 5M bbl/day Supply Loss Looms
Crew safety, not insurance cost, has become the binding constraint on global oil flows through the Strait as refineries brace for mid-April storage exhaustion.
Iran’s March 20 drone strikes on Kuwait’s Mina Al-Ahmadi refinery—processing 730,000 barrels per day—marked the first direct attack on third-country energy infrastructure beyond the Israel-Palestine theater, escalating a regional crisis that now threatens 20 million barrels per day of oil flows through the Strait of Hormuz.
The attack, confirmed by Al Jazeera, followed Iran’s February 28 declaration of the Strait closed after joint U.S.-Israeli strikes killed Supreme Leader Ali Khamenei. Iranian Foreign Minister Abbas Araghchi warned the strikes represented only a “fraction” of Tehran’s capabilities, threatening “zero restraint” if Iranian facilities are hit again. The refinery fires compound a supply crisis that has already wiped 4.5–5 million barrels per day from global markets—approximately 5% of world supply—as tanker traffic through the Strait collapsed from normal levels to near-zero by early March.
The Insurance Paradox
War risk premiums for Strait transit exploded from 0.125% to 5% of ship hull value by mid-March, according to Bloomberg. For a $100 million tanker, that translates to $5 million per voyage—up from $200,000. South Korean insurers faced premium increases of 200–1,000% across 26 renewed contracts, with domestic carriers staring at an estimated $1.4 billion in potential payouts, per the Seoul Economic Daily.
Yet insurance cost has proven irrelevant to the actual bottleneck. “This is currently an unmanageable risk,” Bob McNally, president of Rapidan Energy Group, told the Insurance Journal. “Insurance rates will fall—and the willingness of commercial operators to insure and send cargoes through the Strait will rise—only after Iran’s military capabilities are degraded.” Ship masters are refusing to transit regardless of premium subsidies, with more than 150 vessels anchored outside the Strait to avoid Iranian attack risks. The Trump administration announced a maritime reinsurance program through the Development Finance Corporation in late March, but uptake has been minimal.
“The market is shifting from pricing pure geopolitical risk to grappling with tangible operational disruption.”
— Natasha Kaneva, Head of Global Commodities Research, JPMorgan
Production Collapse Across the Gulf
Kuwait curtailed crude output from 2.6 million barrels per day in January to roughly 500,000 barrels per day by early March, CNBC reported, as Iranian threats made export impossible. The UAE’s refineries faced similar pressures after Iran struck multiple facilities in coordinated attacks. Qatar’s Ras Laffan LNG terminal—supplying approximately 17% of global liquefied natural gas—was also hit, wiping out a critical export node.
The U.S. Energy Information Administration estimates the Strait of Hormuz normally carries 20 million barrels per day, representing roughly 20% of global oil consumption and 25% of seaborne oil trade. Iran’s IRGC has attacked at least 21 merchant vessels since declaring the Strait closed, according to crisis documentation tracked by multiple sources. By late March, tanker traffic had dropped 70–90% from baseline levels, forcing producers to either shut in wells or exhaust onshore storage capacity.
The Mid-April Deadline
Analysts project supply losses will double by mid-April if the Strait remains effectively closed. “That number will double by mid-April, becoming the largest loss of crude supply,” Marko Papic, geopolitical strategist at BCA Research, told CNBC. Gulf producers face storage exhaustion within 10 days, forcing production shutdowns that would remove an additional 3–4 million barrels per day from global supply.
The International Energy Agency authorized a 400-million-barrel emergency reserve release on March 11, temporarily stabilizing prices. Brent crude, which peaked at $126 per barrel on March 9, has since retreated to $92–94 as of late March. WTI trades at $101.55 per barrel as of April 1, according to Oilprice.com. The Dallas Federal Reserve’s modeling suggests a sustained Hormuz closure could drive WTI to $124 per barrel and subtract 2.9 percentage points from annualized U.S. GDP growth.
The current crisis represents the largest energy supply disruption since the 1973 Arab oil embargo. Sultan Al Jaber, chief executive of UAE national oil company ADNOC, described the situation as “global economic warfare.” Unlike the 1973 embargo—where OPEC producers voluntarily curtailed output—this crisis stems from kinetic conflict rendering export infrastructure inoperable and maritime chokepoints impassable.
What to Watch
The next 10 days will determine whether the crisis escalates into a full-blown supply shock or begins to stabilize. Key indicators: whether ship masters begin accepting Strait transits under expanded military escort, signaling operational risk has declined; Kuwait’s ability to restart production above 1 million barrels per day, indicating export channels are reopening; and any shift in Iran’s exemption policy for neutral-flagged vessels, which Tehran has selectively permitted since late March. U.S. military operations to “seize” the Strait, announced by President Trump on March 9 and initiated March 19, have yet to materially change transit patterns. If Gulf storage fills to capacity by mid-April without export relief, analysts expect WTI to breach $130 per barrel—at which point demand destruction begins to offset supply losses, but only after significant economic damage has already occurred.