The escalating tensions in the Persian Gulf have sent a shockwave through the global oil market, with prices surging on Monday. This crisis spotlights the vital role of the Strait of Hormuz, a narrow yet crucial passageway for the world's oil supply.
The Strait of Hormuz: A Choke Point for Global Energy
The Strait of Hormuz, a winding waterway approximately 33 kilometers wide at its narrowest point, serves as the gateway between the Persian Gulf and the Gulf of Oman. From there, ships traverse the globe, carrying a fifth of the world's oil. This strategic passage is bordered by Iran in the north and is considered an international waterway, open to all ships.
A Historical Trade Route
The Strait of Hormuz has long been a pivotal trade route, facilitating the movement of goods such as ceramics, ivory, silk, and textiles from China throughout the region. In modern times, it is the primary route for supertankers transporting oil and gas from Saudi Arabia, Kuwait, Iraq, Qatar, Bahrain, the UAE, and Iran. The majority of this oil is destined for Asian markets, with China being Iran's sole remaining oil customer.
While pipelines in Saudi Arabia and the UAE offer alternative routes, the U.S. Energy Information Administration emphasizes that most oil volumes transiting the Strait of Hormuz have no other means of exiting the region.
The Impact of Disruptions
Disruptions to tanker traffic through the Strait of Hormuz have historically led to spikes in global energy prices. The ongoing war in Iran, which has disrupted tanker movements, underscores the vulnerability of this critical passageway.
Hakan Kaya, senior portfolio manager at Neuberger Berman, emphasizes the gravity of the situation, stating, "The scale of what is at stake cannot be overstated." He suggests that a partial slowdown of a week or two could be managed by oil companies, but a full or near-full closure lasting a month or more would drive crude oil prices, currently around $70, "well into triple digits" and European natural gas prices "toward or above the crisis levels seen in 2022."
Is the Strait Closed?
While the Strait of Hormuz is not officially closed, tanker traffic has plummeted due to disruptions in satellite navigation systems, according to data from Kpler. The U.K. Maritime Trade Operations Center has reported attacks on several vessels in the area on both sides of the strait, warning of increased electronic interference affecting ship tracking systems.
Iran has been issuing threats to vessels approaching the Strait of Hormuz and is believed to have launched multiple attacks.
Global Shipping Impact
Global shippers have responded by suspending operations in the area. Maersk, the world's largest shipping company, has announced the suspension of all vessel crossings in the Strait of Hormuz until further notice. Other major ocean carriers, including Hapag-Lloyd, CMA-CGM, and MSC, have followed suit.
Tom Goldsby, logistics chairman at the University of Tennessee, explains, "No one wants to navigate it, and there's no insurer willing to back any transport going through there right now." He adds, "Those ships stuck in the Gulf are going nowhere. There are also ships heading into the Gulf to replace them, and of course, they're either anchored or going elsewhere now."
Kplr estimates that there are approximately 70 laden oil tankers and 75 clean tankers carrying refined oil products in the Mideast Gulf, awaiting passage through the strait. This is roughly twice the usual number, according to Kplr. Meanwhile, about 60 tankers are holding position just outside the Mideast Gulf, east of the Strait of Hormuz.
A Preview in February
In mid-February, Iran temporarily shut down parts of the strait for what it described as a military drill. Oil prices jumped by about 6% in the following days. This decision was a rare and perhaps unprecedented shutdown of the strait.
In previous periods of tension and conflict, Iran has occasionally harassed shipping through the narrows, and during the 1980s' Iran-Iraq war, both sides attacked tankers and other vessels, using naval mines to completely halt traffic at times. However, Iran has not carried out repeated threats to close the waterway entirely since the 1980s, even during last year's 12-day war when Israel and the U.S. bombarded Iran's key nuclear and military sites.
