Every time tensions in the Middle East escalate, oil market analysts are back to speculating whether Iran will dare attempt to close the Strait of Hormuz, the world’s most vital oil chokepoint, which sees 20% of global daily oil consumption pass through.
The October attack from Iran on Israel and the limited Israeli response have revived speculation on the possible impact of an Iranian blockade of the Strait of Hormuz.
Despite on-and-off threats for years, Iran has never attempted such a blockade. And analysts and geopolitical experts believe it will not do it this time, either.
The closure of the shipping route, where more than 20% of daily oil consumption passes, is a very low-probability event. It would harm both oil exporters from the region, including Iran itself, and all consumers, especially China, the world’s largest crude oil importer, which relies on cheap Iranian oil supply.
However, a large U.S. and European naval fleet presence in the Persian Gulf and the U.S. Fifth Fleet based in Bahrain could move quickly to prevent an attempted Iranian blockade.
China, Iran’s main oil customer, will not be happy with a blockade and traffic disruption, either, as shipping rates and oil prices will jump. The world’s top crude importer depends on the Strait of Hormuz for its vast supply of oil from other Middle Eastern producers, too.
Moreover, Iran’s crude oil going to China these days is reportedly priced at its narrowest discount to Brent in five years as Iranian cargo loadings slumped last month amid fears that Israel would target Tehran’s energy facilities in response to the Iranian missile attack on Israel on October 1.
An Iranian blockade, or an attempt at such, of the narrow strait between Oman and Iran connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea could easily send oil prices soaring above $100 per barrel and reaching all-time highs, analysts say.
However, these same analysts see a Strait of Hormuz disruption as a low-probability event—for now.
Chances of traffic chaos in the strait are low, but if the worst comes to the worst, the impact will be high—not only on oil prices, but on natural gas markets, too, because Qatar's LNG is passing through the lane.
The Strait of Hormuz, which sees oil flow averaging about 21 million barrels per day (bpd), is rightfully described as the world's most important oil transit chokepoint. It is the main export route of Middle Eastern oil to Asia and the key artery of exports of all major producers in the region, including Iran itself.
However, only Saudi Arabia and the United Arab Emirates (UAE) have operating pipelines that can circumvent the Strait of Hormuz, the U.S. Energy Information Administration says.
In the event of a supply disruption, the EIA estimates that around 3.5 million bpd of effective unused capacity from these pipelines could be available to bypass the Strait of Hormuz.
Iran inaugurated the Goreh-Jask pipeline and the Jask export terminal on the Gulf of Oman with a single export cargo in July 2021. The pipeline’s capacity was 300,000 bpd at that time, although Iran has not used the pipeline since then, the EIA notes.
Recent satellite imagery revealed last month that Iran has partially filled the facility with crude oil in what is being construed as a significant development in Tehran's oil export strategy.
Jask could enable Iran to reduce its reliance on this narrow waterway, freeing up options for the country.
Yet, a large part of Iran’s oil could soon find itself with nowhere to go via any channel because President Donald Trump is widely expected to re-impose the “maximum pressure policy” on Iran as soon as he begins his term in office early next year.
By Tsvetana Paraskova for Oilprice.com
