Talk of a possible disruption to traffic in the world's most vital oil cargo lane, the Strait of Hormuz, resurfaced as markets and traders are awaiting the next move in the Israel-Iran standoff.
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 through which 21% of daily global petroleum consumption passes 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's 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.
But 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.
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.
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.
Not enough to offset even a day of a possible blockade.
The oil market currently doesn't believe a Strait of Hormuz supply shock is in the cards, although in the worst-case scenario, what is now seen as low probability could turn out to be a disruption of high-impact proportions.
"The rule of thumb in commodity markets is that if supply is severely restricted then the price will often spike to 5-10x its normal level," Bjarne Schieldrop, chief analyst commodities at Sweden's SEB bank, wrote in a note last week.
"So if worst came to worst and the Strait of Hormuz was closed for a month or more then Brent crude would likely spike to USD 350/b, the world economy would crater and the oil price would fall back to below USD 200/b again over some time."
"But seeing where the oil price sits right now the market doesn't seem to hold much probability for such a development at all," Schieldrop said.
The risk looks remote, while both the U.S. and China would move to reopen the Strait if it is blocked, the analyst added.
A significant disruption to the flows in the Strait of Hormuz would put at risk 14 million bpd of oil supply from the Middle Eastern producers and the significant spare capacity of Saudi Arabia and the UAE.
Such a disruption "would be enough to push oil prices to new record highs, surpassing the record high of close to $150/bbl in 2008," Warren Patterson, head of commodities strategy at ING bank, wrote on Friday.
At present, nearly all analysts doubt that the escalation in the Middle East would be that serious as to lead to a blockade of the Strait of Hormuz.
"[W]ill the US really allow Israel to blow up oil facilities in its antagonist's border during an election year? Will Iran really close the Strait of Hormuz which will not only cut off neighbours' exports, but its own, only noteworthy source of international income?" analysts at oil brokerage PMV say.
"Expansion of war and its damage will need to be proven before oil market participants will shake off the over-riding presence of scepticism."
By Tsvetana Paraskova for Oilprice.com