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The Strait of Hormuz could be the next disruption flashpoint: Tit-for-tat drone and missile exchanges by Iran and Israel, as well as the recent seizure of the MSC Aries by Iranian forces have boosted risks for disruptions at the Strait of Hormuz, a key trade choke point for a substantial share of the world’s oil trade. Upheaval at the strait could severely impact the global economy, triggering delays and higher inflation, with supply chains already under pressure due to persisting disruptions at the Red Sea and Panama Canal.
Tensions have been bubbling to the surface: The latest attacks mark part of a broader pattern of conflict, with both Iran and Israel frequently engaging in covert attacks against each other. Israel is concerned about Iran developing nuclear weapons and has attempted to disrupt the country’s nuclear program via targeted attacks while Iran has made use of its proxies to retaliate.
Recent hijackings are fanning flames: Prior to the MSC Aries seizure, Iran and the US have also tangled near the strait with Iran hijacking a tanker in January, a year after the US seized the same tanker — dubbed Suez Rajan at the time — in a bid to enforce sanctions. The outbreak of the Gaza War late last year further inflamed tensions in the region, with Iran calling on Muslim countries to impose an oil embargo on Israel a few weeks into the conflict.
The Strait of Hormuz is a key passage: Bordered by Iran to the north and the UAE and Oman to the south, the strait handles some 30% of the global oil trade, Bloomberg reported. KSA, Iraq, Kuwait, the UAE, and Iran, rely heavily on the waterway for their energy exports, moving 15.5 mn barrels per day (bpd) of crude and condensates through it in 1Q 2024, the outlet said. Up to 40 tankers hauling crude potentially transit the strait on a daily basis, according to BIMCO figures in 2019. The strait is also an essential to the global LNG market, with over one-fifth of the world’s supply, primarily from Qatar, passing through in 1Q 2024.
A history of threats: Iran has seized tankers and posed the threat of closing the strait prior to thelatest flare up in tensions with Israel. Iran threatened to close the artery in protest to Western sanctions on its alleged Nuclear program in 2011, with Iranian officials warning that “not a drop of oil will pass through the Strait of Hormuz.” The Iran-Iraq war in the 1980s saw both sides of the conflict routinely attack tankers in an effort to curb rival’s exports, with the so-called Tanker War seeing a spike in oil prices and tanker ins., Bloomberg said.
Who stands to lose most? Iraq, Qatar, and Kuwait move 100% of their energy exports via the strait, with no alternatives available. In 2023, Qatar, the world’s third-largest LNG exporter, transported some 108 billion cubic meters (bcm) of LNG through this vital chokepoint, accounting for approximately 20% of the global LNG trade.
The UAE has an alternative route: The UAE opened the 370 km Abu Dhabi Crude Oil Pipeline in 2012 to bypass the strait and provide direct access to the Indian Ocean. The pipeline stretches from the Habshan oil fields in Abu Dhabi to onshore storage and offshore loading facilities at the Emirates’ Fujairah oil and bunkering hub.
KSA also has a backdoor: Saudi Arabia, the largest oil exporter through the Strait of Hormuz, will face pressure moving its exports if the strait is disrupted. KSA could use a pipeline to the Red Sea to reshuffle some of its exports to avoid the strait, ExxonMobil’s Global Freight Analyst Matias Togni (LinkedIn) told Enterprise Logistics. Such a move would still be insufficient to stabilize global oil supply and does not help exporters like Iraq which remain highly dependent on the strait, Mattias told us.
Where do we go from here? It is still too early to say if Iran’s seizure of the MSC Aries was a one-off, or if there will be further disruptions at the strait, CEO of tech firm Vizion Inc Kyle Henderson told Bloomberg. However, a blockade of the strait could do more harm than good for Iran, which has used the strait to export “record quantities” of crude to China, earning it much needed revenue, Togni added.
