Iran's strategic oil island thrust into the spotlight as Middle East conflict escalates

Iran's Kharg Island, a small but strategically vital strip of land nestled in the waters of the northern Persian Gulf, has been left untouched by U.S. and Israeli forces even as the Middle East conflict enters its second week.

The coral island, which is located about 15 miles off the coast of mainland Iran, serves as the centerpiece for Iran's oil industry.

It is estimated that around 90% of the country's crude exports pass through it before tankers then travel through the Strait of Hormuz. The island is also said to have a loading capacity of roughly 7 million barrels per day.

Kharg Island's economic importance to Iran makes it particularly vulnerable to the threat of military action, although analysts say that any attempt to seize it would likely require a ground troop operation, which the U.S. appears reluctant to undertake.

An attack would also likely prompt further energy market volatility at a time when oil prices have soared to more than $100 a barrel.

Seizing the island "would cut off Iran's oil lifeline," which is essential for the regime, according to Petras Katinas, a research fellow in climate, energy and defense at RUSI, a London-based defense think tank.

"Of course, with shipping via the Strait of Hormuz now stopped, they cannot sell oil anyway, but looking ahead, seizure would give the US leverage during negotiations, no matter which regime is in power after the military operation ends," Katinas told CNBC by email.

"Yet, seizure, would require a ground troop operation, which this administration seems hesitant to undertake. At least for now," he added.

Crude futures climbed to their highest level since mid-2022 on Monday after the U.S. and Israel launched a fresh wave of strikes across Iran over the weekend.

The attacks struck several Iranian fuel sites, including oil storage depots, signaling a new phase of the war as the sprawling Middle East crisis continues into its tenth day.

International benchmark Brent crude futures with May delivery traded nearly 16% higher at $107.18 per barrel on Monday morning, paring earlier gains, while U.S. West Texas Intermediate futures with April delivery were last seen 12.5% higher at $102.1.

"If President Trump were to decide to seize this pivotal hub, it would deal a significant blow to the Iranian regime, as it would deprive them of a critical source of revenue. Such a move would be reminiscent of the U.S. intervention in Venezuela at the beginning of the year, when it effectively took control of the country's oil sector," Tamas Varga, an oil analyst at brokerage PVM, told CNBC By email.

"While it might suggest the resumption of Iranian oil exports—under U.S. supervision, of course, and only if the Strait reopens—it would at the same time remain vulnerable to drone attacks from within Iran. An eventual U.S. occupation of the island would further complicate an already complex situation," he added.

Typically, about 20% of the world's oil and gas passes through the Strait of Hormuz, but shipping traffic has all but halted through this key maritime corridor since the war started late last month.

U.S. President Donald Trump may be tempted to order U.S. forces to try to seize Kharg Island for several reasons, according to Marc Gustafson, former head of the White House Situation Room, who previously served under presidents Trump, Joe Biden and Barack Obama.

These include the opportunity for Trump to claim a "big PR win," the chance to give U.S. troops a natural barrier from mainland Iran, and the fact that it fits with the president's push to secure maximum leverage over the Iranian regime.

Gustafson, who now works as the senior director of analysis at Eurasia Group, said that any such operation would be fraught with risk, however.

An attempt to seize the island would require U.S. troops on the ground and likely see it become a multi-week target for Iranian drones, Gustafson said in a LinkedIn post last week.

He also warned it could push oil prices up even further and Tehran may even consider an act of self-sabotage to destroy the oil pipeline that feeds it.

"There is one concept or one dimension of this that no one seemingly has mentioned, which is Kharg Island," Jan van Eck, CEO of VanEck Funds, told CNBC's "Power Lunch" on March 2.

"It's where 90% of Iran's oil gets exported out of — that is a choke point. And if you think that Trump just follows the same playbook that he did in Venezuela. What did he do? He cut off their oil exports, their hard currency, and I think he is going to want that leverage point going forward," Van Eck said.