How the world’s most important oil chokepoint could factor into escalating US-Iran tensions


Tankers depicted in the Strait of Hormuz — a strategically important waterway which separates Iran, Oman and the United Arab Emirates.

ATTA KENARE | AFP | Getty Images

A critical gateway to the world’s oil industry has been thrust back into the global spotlight, following a dramatic escalation in geopolitical tensions since the targeted killing of a top Iranian general.

The death of Iranian military commander Qasem Soleimani at the end of last week has ratcheted up already-high tensions between Washington and Tehran, with many investors increasingly anxious that a widening conflict could disrupt global oil supplies.

Analysts at Eurasia Group predicted the most likely outcome of Soleimani’s death would be a months-long “escalatory cycle” of tit-for-tat responses in the Middle East, before mediation efforts eventually lead to de-escalating U.S.-Iran tensions.

But, as tensions continue to ramp up initially, analysts at the political risk consultancy said they would expect to see Iran harass commercial shipping in the Gulf — “and shipping in the Strait of Hormuz will be temporarily disrupted with navy drills.”

Situated between Iran and Oman, the Strait of Hormuz is a narrow but strategically important waterway that links crude producers in the Middle East with key markets across the world.

It was the focal point of heightened U.S.-Iran tensions in May and June last year, when six oil tankers and a U.S. drone were attacked in, or near, the waterway.

Energy security in the Gulf

Oil prices were trading higher on Monday, extending gains following Friday’s more than 3% jump.

International benchmark Brent crude traded at $69.62 at around 12:15 p.m. London time, up around 1.5%, having briefly climbed above $70 a barrel earlier in the session. It was the first time since May that Brent futures had surpassed this psychologically important level.

U.S. West Texas Intermediate (WTI) stood at $63.78 Monday morning, up more than 1.1% for the session.

The Energy Information Administration (EIA) has previously described the Strait of Hormuz as the world’s most important oil chokepoint. In 2018, daily oil flow in the channel — which is just 21 miles wide at its narrowest point — averaged at 21 million barrels per day. That’s the equivalent of about 21% of global petroleum liquids consumption.

The EIA defines a chokepoint as a narrow channel along widely used global sea routes that are critical to energy security.

Shutting off the Strait ‘of no interest to anyone’

Samir Madani, co-founder of satellite tracking firm, told CNBC’s “Squawk Box Europe” on Monday that shipping flows via the Strait of Hormuz had been little changed since the targeted killing of Soleimani.

He emphasized that China was the biggest importer out of the Persian Gulf region. And, “as a result of that, the relationship between Iran and China needs to be maintained.”

“So, they are not going to shut off the Strait anytime soon,” Madani said.

The EIA estimated that 76% of the crude oil and condensate that moved through the chokepoint went to Asian markets in 2018. China, India, Japan, South Korea, and Singapore were thought to be the largest destinations for crude oil moving through the Strait of Hormuz to Asia over the same time period, accounting for 65% of all Hormuz crude oil and condensate flows.

Madani said that while “there may be skirmishes” in the Strait over the coming weeks, it would be “of no interest to anyone” to completely cut off the channel.

Iran has said the White House made a “grave mistake” in giving the order to kill Soleimani, with the Islamic Republic’s supreme leader Ali Khamenei vowing to deliver “severe revenge” to those responsible.

President Donald Trump has since warned Iran the U.S. would strike back if Tehran’s military forces attacked any American person or target following the killing of Soleimani, before adding Washington could do so “perhaps in a disproportionate manner.”

Source: CNBC

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