Quick Bite – Why is everyone talking about the Strait of Hormuz?
We have all heard about the US bombing of three nuclear facilities in Iran over the weekend. Now investors are waiting and watching to see what the Iranian response might be – apart from lobbing missiles on Israel. One response from the Iranian parliament was a threat to close the Strait of Hormuz.
What and where is the Strait of Hormuz?
Source: Wikipedia
Roughly 20% of the world’s petroleum passes through the 32 km-wide strait, a strip of water connecting the Persian Gulf to global markets, where dozens of tankers each day funnel into a pair of 2-mile-wide traffic lanes separated by a 2-mile-wide buffer. The transit through that 6-mile strip within the strait includes a similarly huge share of the world’s liquefied natural gas.
After US forces struck the nuclear sites, Iranian state media reported that Iran’s parliament had approved a closure of the strait. But they added that ultimate power to do so lay with the regime’s top security officials.
Investors’ principle concerns are oil supplies and non-oil shipping. While there have been threats to close the Strait of Hormuz, Iran needs oil revenue and does not want to alienate other oil-exporting Gulf states. Attacks on shipping by Iranian-sponsored terrorist groups might be more likely.
Source: Goldman Sachs
Any disruption to ship traffic would slow Iranian energy exports, a lifeline to Iran’s economy. Oil accounts for roughly 10% of Iran’s GDP. While the service sector is the largest component of Iran’s economy, oil and gas production, along with refining, contribute significantly to the country. Although Israeli strikes have hit Iran’s domestic energy infrastructure in recent days, shipments from the country have continued flowing to China and elsewhere. Rystad Energy estimates that Iranian exports since the outset of Israeli strikes are 30% to 40% higher than typical volumes this time of year. Iran needs the revenue.
Commentators have said that the likelihood of a disruption to tankers in the Strait will ultimately depend on whether the conflict continues to expand and if the regime sees itself as facing an existential threat.
Strategically, Iran could view short-term economic sacrifice as leverage on the US and global economy, but it would also sacrifice its sole global energy revenue stream, create domestic blowback and risk long-term reputational damage.
How desperate is Iran?
Naval analysts and tanker operators say the Iranian navy has increasingly projected power using what is called an asymmetric tool kit, including groups of small, speedy boats that swarm larger targets. Mines laid in the waterway could cripple ships, while sunken tankers could potentially block the passage for a longer period.
“They can also storm ships on helicopters and hold them for long periods,” said Erik Hanell, the chief executive of Swedish-based tanker operator Stena Bulk, which has tankers in the area.
Commandos from Iran’s Islamic Revolutionary Guard Corps stormed one of the company’s tankers, the Stena Impero, in 2019 and held it for three months in response to the UK stopping an Iranian tanker in Gibraltar.
Ship crews said IRGC speed boats have come within yards of tankers. “They are all over the place,” said Mihai Barbu, an executive officer for a European tanker that is about to enter the strait from its north side. “They can use high explosives on the hull, hit us with rocket-propelled grenades or use heavy artillery from their bases on the coast. It’s scary.”
Many oil traders and energy executives still view the scenario of Iran “closing” the Strait as a desperation tactic and remote possibility. Tanker-tracking firms said on Sunday that traffic through the strait was proceeding as usual.
Even so, oil markets remain on edge. The cost of Brent crude futures, the international pricing benchmark, jumped 3.2% on Sunday, trading around $79.50 a barrel. Prices have now climbed about 15% since Israel attacked Iran earlier this month.
Crude oil over 5 years
Source: Trading Economics
