Kuwait faces a $32 billion deficit as Hormuz closure halts oil exports

Kuwait's oil sector has been largely paralysed for close to six months as the effective closure of the Strait of Hormuz cuts the country off from its only export route. Kuwait Petroleum Corporation (KPC) chief executive Shaikh Nawaf Saud Al-Sabah described the situation as the toughest crisis the Kuwaiti oil industry has faced since the Iraqi invasion of 1990. The comparison carries weight because oil supplies more than 90 percent of government revenue and almost all export earnings for the country, which holds roughly 6 percent of global oil reserves.

Saudi Arabia can move barrels to the Red Sea through the East-West pipeline and the United Arab Emirates can load at Fujairah on the Gulf of Oman, but Kuwait has no pipeline that bypasses the strait. Every barrel it sells has to sail out of the northern Gulf and through the contested waterway. Before the war, Kuwait produced slightly more than 2.6 million barrels per day and had a long term plan to reach 4 million barrels per day by 2040.

The disruption began with the start of the war between Iran and the United States and Israel on 28 February 2026. Iranian forces threatened and attacked merchant vessels, laid sea mines and forbade passage through the strait, which pushed war risk insurance to prohibitive levels and stopped commercial traffic almost entirely. Kuwait started precautionary production cuts in March and KPC declared force majeure on oil shipments shortly afterwards. The United States added a naval blockade of Iranian ports on 13 April. Kuwait also absorbed repeated Iranian strikes on desalination plants and energy installations, and the KPC headquarters itself was hit by a drone in April, forcing the chief executive into temporary offices.

The financial damage was immediate. Preliminary official data show the Kuwaiti economy contracted 4.6 percent year on year in the first quarter of 2026, with oil sector output falling 12.5 percent. Those figures only capture the first month of the conflict, so the full picture is worse. National Bank of Kuwait has projected a 26 percent decline in oil GDP across 2026 and average crude output of 1.84 million barrels per day, against 2.47 million in 2025.

There was a genuine recovery in early summer. A memorandum of understanding signed by Washington and Tehran on 17 June reopened the strait to commercial traffic, KPC lifted its force majeure notices in mid June, and volumes came back quickly. Kuwaiti crude output averaged about 1.65 million barrels per day in June and rose to roughly 1.97 million barrels per day in July. Brent fell as low as 69 dollars a barrel on 2 July as traders priced in a return of Gulf supply.

That window closed. Disputes over which routes vessels could use broke the agreement within weeks, Iran resumed attacks on tankers moving along the Omani coast under US naval protection, and Washington reimposed its blockade and carried out further air strikes. President Donald Trump declared the ceasefire over in mid July. Brent spiked to 105 dollars a barrel on 23 July as shipments through the waterway fell again.

By August the export picture had reverted to the spring. Oil Minister Tariq Al-Roumi said on 6 August that Kuwaiti oil exports had stopped completely because of the de facto closure of the strait, and that exports would remain at zero for as long as it stayed shut. He also said rebuilding the storage tanks damaged in Iranian attacks would take at least a year. Two tankers operated by ADNOC were attacked on 14 August while attempting to cross the strait. Transit data confirms the collapse, with three vessels crossing on Sunday 16 August against a five day average of 12 and a pre-war norm of about 130 per day.

The diplomatic track remains unresolved as of 18 August. Iran and Oman have agreed the outline of a temporary framework that would route inbound vessels through an Iranian-controlled lane and outbound vessels through an Omani-controlled lane, but Tehran insists that reopening also depends on the United States lifting its naval blockade and correcting what it calls violations of the June memorandum. Trump has stated that the strait is open and that all mines have been removed or detonated, while US Central Command has not confirmed the demining claim. Brent traded near 91 dollars a barrel on 18 August, roughly 38 percent above the level of a year earlier.

The fiscal arithmetic is now the central risk for Kuwait. The 2026 to 2027 budget, which runs from 1 April, was built on an oil price assumption of 57 dollars a barrel and already projected a deficit of 9.8 billion dinars, about 32 billion dollars, up almost 55 percent on the previous year. The break-even price the country needs to balance its budget is 90.5 dollars a barrel, and oil was expected to supply close to 80 percent of budgeted revenue. With exports intermittently at zero, the government has stepped up borrowing on local and international debt markets, and the Central Bank of Kuwait has been issuing fresh bonds that banks have snapped up several times over. Kuwait retains sovereign wealth assets estimated above 1 trillion dollars, which gives it a deep cushion, but the cushion buys time rather than solving the export problem.

Contingency measures have limited reach. KPC has drawn on storage tanks it holds outside the region to keep some customers supplied, and Gulf producers have used ship to ship transfers near Sohar in Oman to load crude onto very large crude carriers positioned outside the restricted corridor. Kuwait is also in talks with Saudi Arabia, the United Arab Emirates and Oman about building a crude export pipeline that would bypass Hormuz, with one option running to the Red Sea and another linking Kuwait to Fujairah. Neither route would deliver barrels for years. Domestically, refining has held up better than exports, with the 615,000 barrel per day Al-Zour refinery running at reduced rates without sustained direct damage.

The recovery timeline matters for buyers planning their own procurement. KPC has said it can restore about 70 percent of production within six to eight weeks of a durable reopening, with the remaining 30 percent taking roughly another month, and that refinery output could return to normal in two to three weeks. Kpler analyst Amena Bakr has given a similar estimate of two to three months for a return to pre-war levels. Broader forecasts are more cautious. The International Energy Agency has said full normalisation of Hormuz transits could take six to eight months in a best case, ADNOC (Abu Dhabi National Oil Company ) has suggested traffic may not recover fully until the middle of 2027, and the US Energy Information Administration does not expect Middle East production to approach pre-conflict levels before early 2027.