What is the strait of Hormuz and why is it crucial for oil supplies?
The US-Israeli war on Iran has ignited fears that escalating military aggression in the Middle East could send oil prices soaring, push up prices at the pump and drive a global economic downturn.The US began “major combat operations” in Iran on Saturday morning, shortly after Israel launched a strike against Tehran.Within hours of the US-Israeli strikes, Iran’s Revolutionary Guards reportedly warned tankers in the strait of Hormuz that no ship would be allowed to pass through the world’s most critical oil trade route.Iran has not formally confirmed a block on the narrow waterway, which would be an unprecedented escalation in the region, but ships appear to be avoiding the strait after an attack on a ship off Oman.At least 150 tankers carrying crude, liquified natural gas and oil products had dropped anchor in open waters across the Gulf past the strait on Sunday, Reuters reported.
If the halt continues, it could block up to 15m barrels a day of crude oil from reaching their destinations,In a worst-case scenario, experts have said oil market prices could surge from about $67 a barrel on Friday night to $100,This would spell trouble for many developed economies, including the US, that have struggled to shrug off the impact of inflation on growth and productivity,That has left households facing a cost of living crisis,Bjarne Schieldrop, the chief commodities analyst at the financial services group SEB, said: “It has become quite clear now that this is the biggest bluff in history and it has gone horribly wrong.
Now it is difficult for Trump to back down and pull out all his gunboats and fighter jets without losing face.”Iran is home to the world’s fourth largest proven oil reserves, holding up to 170bn barrels of oil, or about 9% of all global crude.It is behind only Venezuela, Saudi Arabia and Canada as the largest country by domestic oil reserves.It is the fourth largest oil producer in Opec and one of the largest crude exporters in the world.It also has the world’s second largest proven gas reserves, with about one-sixth of global gas.
Decades of political unrest, war and sanctions throttled its crude production from a peak in 1974 of about 6m barrels of oil a day to about 3.5m barrels.In recent months its output has reached historic highs, despite US sanctions and Israeli bombardments, due to close ties with China.Beijing imports about 90% of Iran’s crude, which is subject to international sanctions.Although Iran’s crude exports make up about 3-4% of the global market, its significance for the global oil markets extends well beyond its own production, according to experts.
Jorge León, the head of geopolitical analysis at Rystad Energy, said: “The country’s geopolitical weight is rooted in its strategic location, its influence over regional security dynamics and its capacity to disrupt critical energy infrastructure and transit routes.”The strait of Hormuz is one of the most important arteries for global trade.About 20% of all oil supplies and about 20% of seaborne gas tankers pass through it.The strait lies between Oman and Iran.It links the Gulf to the north with the Gulf of Oman to the south and the Arabian Sea beyond.
It is 20 miles (33km) wide at its narrowest point, with the shipping lanes just 2 miles (3km) wide in either direction.This location makes it a crucial choke point for oil deliveries from Opec countries to customers in Asia.Options to bypass the strait are limited.For years, Tehran has warned that it could shut the strait in retaliation against any military aggression, but it has stopped short of a prolonged block on the trade route.León said Iran had now retaliated in a “far more aggressive and expansive manner than in prior exchanges”, which he said “marks a structural widening of the conflict beyond contained or symbolic strikes”.
Ajay Parmar, a director at the energy market specialists ICIS, said: “Shutting the strait would be a last-resort tactic for Iran,We would expect to see this in a hot-war scenario,”However, with tankers anchored and crew waiting outside the strait to see how events unfold, the impact on trade is already being felt,León added: “Whether the strait is closed by force or rendered inaccessible by risk avoidance, the impact on flows is largely the same,”The tankers in limbo include a vessel chartered by Centrica, the owner of British Gas, containing a spot-market cargo of liquefied natural gas (LNG) from Qatar.
The destination of the vessel is not certain, although it may have been on the way to Asia.A Nigerian vessel due to arrive in Qatar on 5 March before importing LNG to Europe aborted the trip before arriving in the strait.Tamsin Hunt, a senior analyst at S-RM, a global intelligence and cybersecurity consultancy, said: “Closing the strait in full would be devastating for Iran’s own economy, as it would mean halting all its exports of oil and other goods.Iran would likely only close the strait as a last resort if the regime feels its core survival is under threat.”Parmar said Donald Trump would hope to avoid an escalation that caused global oil prices to rocket, raising costs for US voters before midterm elections in November.
But a full closure of the strait is not the only tactic at Iran’s disposal,Hunt said: “Vessels could face potential signal jamming, detentions of ships and crew, firing of warning shots, and sea mines that would partially obstruct the strait,Even small disruptions would have an outsized impact on the global oil sector, with delays, diversions and increased insurance and freight costs likely to drive global prices up,”Before the strikes, oil market observers had expected scenarios involving limited military action to add about $10 a barrel to the global oil price,Financial markets now expect a 9% jump in the price of Brent crude to $73 a barrel on Monday alone.
Rystad Energy has said the price could jump by as much as $20 at the start of the week, to about $90 a barrel, unless there is a rapid de-escalation on Sunday before the New York oil futures market resumes trading at 11pm UK time,The price is still expected to rise despite the Opec nations and other oil-producing countries such as Russia agreeing a larger than planned production increase when they met on Sunday to counter the effects of the conflict,A prolonged disruption of the strait of Hormuz could drive oil prices above $100 a barrel, analysts said,Even in the scenario of a short and targeted US campaign, Hunt said, any strikes on Iran’s oil production and supply lines would disrupt flows to its key trading partner, China, driving increased prices globally as China competed in the global market to replace its losses from other sources,
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