Discussions about potential traffic disruptions in the Strait of Hormuz, a crucial oil shipping route, have resurfaced as traders and markets monitor the ongoing tensions between Israel and Iran.
Analysts warn that an Iranian blockade or attempts to restrict access to this narrow strait could push oil prices above $100 per barrel, possibly reaching historic highs. However, these experts consider the likelihood of such a disruption low—at least for now.
The Strait of Hormuz is vital, as it accounts for 21% of the world’s daily petroleum consumption. While the chances of significant traffic disruptions are slim, any major issues could have severe consequences, not only for oil prices but also for natural gas markets. This is particularly important as Qatar’s liquefied natural gas (LNG) exports also pass through the strait.
Currently, the Strait of Hormuz handles an average of 21 million barrels of oil per day, making it the most critical oil transit point globally. It serves as the primary export route for Middle Eastern oil to Asia and is essential for all major producers in the region, including Iran.
According to the U.S. Energy Information Administration (EIA), only Saudi Arabia and the United Arab Emirates (UAE) have operational pipelines that can bypass the Strait of Hormuz. Iran launched the Goreh-Jask pipeline and the Jask export terminal in July 2021, initially designed to carry 300,000 barrels per day. However, this pipeline has not been utilized since its inauguration.
In the event of a supply disruption, the EIA estimates that approximately 3.5 million barrels per day of unused capacity from these bypass pipelines could be available. Still, this amount would not be enough to compensate for even a single day of a potential blockade.
The current sentiment in the oil market does not suggest that a disruption in the Strait of Hormuz is likely. However, analysts warn that if such an event were to occur, the impact could be significant.
Bjarne Schieldrop, chief commodities analyst at Sweden’s SEB bank, noted, “If supply is severely restricted, prices can spike to five to ten times their normal level.” He predicts that if the Strait of Hormuz were closed for a month or longer, Brent crude prices could soar to $350 per barrel, leading to a severe economic downturn. Over time, prices would likely fall back to below $200 per barrel.
Despite these warnings, Schieldrop emphasized that the current oil prices reflect a low probability of such an event. He added that both the U.S. and China would likely act to reopen the Strait if it were blocked.
A significant disruption in the Strait of Hormuz could jeopardize 14 million barrels per day of oil supply from Middle Eastern producers, along with the considerable spare capacity from Saudi Arabia and the UAE. Warren Patterson, head of commodities strategy at ING bank, stated that such a disruption could lead to oil prices surpassing the previous record high of nearly $150 per barrel in 2008.
Most analysts remain skeptical that tensions in the Middle East will escalate to a level that would cause a blockade in the Strait of Hormuz. Analysts from the oil brokerage PMV questioned whether the U.S. would allow Israel to attack oil facilities near its borders during an election year. They also pondered whether Iran would be willing to close the strait, considering it would cut off not only its neighbors’ exports but also its own key source of international income.
“Participants in the oil market will need clear evidence of escalated conflict before they shake off their prevailing skepticism,” they concluded.
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