Strait of Hormuz faces new threats amid rising Middle East tension

CNBC features that the Strait of Hormuz has regained global attention as a crucial oil transit route as tensions escalate in the Middle East.

Located between Iran and Oman, this narrow yet strategically significant waterway connects Middle Eastern crude producers with major global markets. In 2022, the Strait saw an average oil flow of 21 million barrels per day, accounting for approximately 21 per cent of the global crude trade, according to the US Energy Information Administration (EIA).

Disruptions to oil transit through this key chokepoint, even for a short period, can lead to increased global energy prices, higher shipping costs, and significant delays in supply. For many energy analysts, any blockade or major disruption in the Strait of Hormuz is regarded as a worst-case scenario, potentially driving oil prices well above $100 a barrel.

Alan Gelder, an energy analyst at Wood Mackenzie, noted that if Israel were to strike Iran and Iran retaliated by attempting to block the Strait, the consequences would be severe. He highlighted that around 20 per cent of global crude exports pass through this route, including oil from Saudi Arabia, Kuwait, Iraq, and the UAE, which collectively hold significant spare capacity.

Gelder pointed out that the market does not seem to be fully accounting for these worst-case scenarios, focusing instead on potential impacts on Iranian energy infrastructure. Israel's vow to retaliate against Iran after a recent ballistic missile attack has led to speculation about possible strikes on Tehran's energy facilities. Meanwhile, Iran has threatened a strong response to any further Israeli actions, emphasizing its significant role in the global oil market.

Analysts like Saul Kavonic from MST Financial have raised concerns that oil markets may be underestimating the risks associated with the escalating conflict in the Middle East, warning that disruptions in the Strait of Hormuz could lead to a substantial increase in oil prices. “If we experience an attack on Iranian oil production, up to 3 per cent of global supply could be disrupted. Even tighter sanctions might lead to a similar reduction in supply, which could drive oil prices close to or above $100 per barrel,” Kavonic told CNBC’s “Squawk Box Asia” on October 3.

He further stated, “If transit through the Strait of Hormuz were affected, the impact on oil prices could be three times greater than the oil shocks of the 1970s following the Iranian revolution and the Arab oil embargo, potentially pushing prices over $150 per barrel.” On October 8, oil prices dipped, reversing some recent gains after recording their steepest weekly increase since early 2023.

International benchmark Brent crude futures for December delivery were down 2.1 per cent, trading at $79.19 per barrel, while US West Texas Intermediate futures fell 2.2 per cent to $75.42. Bjarne Schieldrop, chief commodities analyst at SEB, noted that typically, when supply is heavily restricted, prices can surge to five to ten times their normal levels. “If the worst were to happen and the Strait of Hormuz was closed for a month or more, Brent crude could potentially soar to $350 per barrel, which would severely impact the global economy before prices eventually settled back below $200,” he said in a research note. 

“However, current oil prices suggest that the market does not anticipate such a scenario.” Warren Patterson, head of commodities strategy at ING, warned that any disruptions in the Strait of Hormuz would have far-reaching effects on global energy markets. “While extreme, the primary concern would be that these disruptions could affect Persian Gulf oil flows,” he stated in a note published on October 4. 

“A significant disruption could push oil prices to new record highs, exceeding the nearly $150 per barrel peak in 2008.” Patterson added that disruptions in the Strait of Hormuz would not only impact oil but could also disrupt liquefied natural gas (LNG) flows from Qatar, which supplies over 20 per cent of the global LNG trade. “This would create a shock in global gas markets, particularly as we enter the northern hemisphere winter when heating demand increases. While new LNG export capacity is ramping up, it still falls short of Qatar's export levels.”

By Naila Huseynova