Blockade of the Strait of Hormuz
As tensions rise in the Middle East, one question looms: will Israel retaliate against Iranian oil infrastructure, triggering another oil price shock? The oil markets are on edge, anxious about potential supply disruptions in the Strait of Hormuz.
Iran’s recent launch of 200 missiles targeting Israel has intensified fears of an aggressive Israeli response. If Israel reacts too forcefully, we may witness a full-blown confrontation, escalating an already volatile situation.
Israel is aware that further escalation could disrupt global oil markets and even impact U.S. elections! That is why Washington has urged Israel to focus its strikes on military targets only, avoiding Iranian oil sites. However, if Israel chooses to target oil infrastructure alongside military installations, this could severely disrupt supplies and potentially trigger a blockade of the Strait, a scenario that would propel another oil price shock.
Iran is taking the Israel’s threat seriously. Shortly after the October 1 attack, the National Iranian Tanker Company directed several empty tankers to leave their moorings at Kharg Island, where 90 percent of Iranian oil is loaded or export. These tensions are unsettling the market—the price of Brent crude jumped nearly 4 percent on October 7 in anticipation of Israel’s response.
The Strait of Hormuz is a major marine transit chokepoint
Strait of Hormuz is a vital shipping route nestled between Iran and Oman, linking Middle Eastern crude producers to key global markets. Approximately, 18,4 million barrels a day (mb/d) transit the strait with 70% destined for Asia. That is 25% of daily global petroleum consumption. The Strait contains eight major islands, seven of which are controlled by Iran. Iran and the United Arab Emirates disagree as to the ownership of the strategically located Abu Musa, Greater Tunb, and Lesser Tunb islands. Nonetheless, Iran has maintained a military presence on these islands since the 1970s.
Because of its importance, the Strait of Hormuz is one of the most vulnerable marine transit chokepoint. Maritime chokepoints are strategic, narrow passages that connect two larger areas and serve as critical waterways facilitating international trade. These locations are typically straits or canals where high volumes of traffic converge, creating vulnerabilities due to structural risks, geopolitical tensions, and piracy. You can see on the image all major global oil corridors and the main chokepoints.
While Saudi Arabia and the United Arab Emirates (UAE) possess operating pipelines capable of circumventing the Strait, the available capacity is around 3.5 million barrels per day. If a supply disruption occurs, this capacity could be crucial in easing some of the pressures.
Another oil price shock with the oil of $300 per barrel?
A complete blockade of Strait of Hormuz by Iran (although highly unlikely) could send oil prices soaring above $300 per barrel. The implications of this crisis extend beyond oil, impacting natural gas markets as well, especially since Qatar’s LNG shipments also pass through this essential route.
On a positive note, Prime Minister Netanyahu has stated that military responses will target predominantly military facilities rather than oil infrastructure, though the stakes remain high. Meanwhile, the U.S. is responding to Iran’s missile strikes with new sanctions, urging Israel not to strike Iranian oil assets. While these sanctions complicate Iran’s oil exports, they do not completely halt them, allowing Iran to navigate through phantom fleets and front companies (similar to Russian shadow fleet of oil tankers).
As the situation unfolds, it’s essential to keep a close watch on developments — this moment could prove pivotal for the global energy sector. The implications are clear: the geopolitical chess game in the Middle East transcends regional issues; it could be the catalyst for a significant global oil crisis.
Finally, it’s intriguing to note that a relatively small and non-oil producing country like Israel can wield such power to impact and influence global oil prices. What a world we live in!
