Increasing tensions between Iran and the US have led to fears of a widening conflict in the Middle East, with energy market participants increasingly concerned that the fallout could soon disrupt regional crude supplies.
Some analysts have been warning that as Iran controls the vital trade route, the Strait of Hormuz, oil prices will skyrocket if Tehran seals it off.
Speaking to CNBC last week, James Eginton, investment analyst at Tribeca Investment Partners, said a move by Iran to completely shut off crude supplies in the Strait of Hormuz would send oil prices “through the roof”.
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.
British warships have also reportedly been stationed near the Gulf in order to support British-flagged oil tankers through the Strait of Hormuz if required.
The waterway is not only important for Middle Eastern countries, states in Asia also benefit from it. In 2018, China, India, Japan, South Korea and Singapore were the largest destinations for crude oil moving through the Strait of Hormuz, accounting for 65 per cent of all Hormuz crude oil and condensate flows, according to US Energy Information Agency (EIA).
Last week, India was a key participant at a special meeting in Tehran on the Hormuz Peace Initiative.
China, which buys 50-70 per cent of Iranian oil exports, would also be opposed to any interruption of energy flows through the Strait.
This narrow mouth of the Gulf sees 21 million barrels of oil pass through it every day; making up one fifth of global petroleum liquids consumption, EIA says, which adds that the area is critical to “energy security”.
This means that the inability of oil to transit a major chokepoint, even temporarily, can lead to substantial supply delays and higher shipping costs — resulting in higher global energy prices.
Though the world continues to be well supplied with oil through the Strait, key oil finds around the world could help balance the demand.
In the week that the General Qassem Soleimani was assassinated by the US, American oil company Apache and France’s Total made a large oil discovery in Suriname, Exxon Mobil recently hit oil in Guyana next door and Brazil could also bring on new supplies this decade. Meanwhile, Argentina has started producing shale. New supplies from the Western Hemisphere will buffer disruptions in the Middle East and continue to lower the value of its oil.
It is not only petroleum that depends on the Strait as a means of transport, a “third of the world’s [liquefied natural gas] LNG trade” also passes through this waterway; and it is the route which the world’s largest LNG exporter -Qatar – uses for almost all its exports.
Though Iran could exact revenge on the US by shutting the Strait or harassing tankers traveling through it, Tehran would not want to upset Qatar, one of the few allies it has in the Gulf.
As Oman’s new leader, Sultan Haitham, takes to his new role, Iran will hope to keep him onside and maintain Muscat’s position as mediator able to help calm tensions between Iran and its adversaries when they occur.
Closing off the Strait of Hormuz would undermine Iran’s international relations with the few partners it has left. On a strategic level, the value of Tehran’s trade with China is too vital for Iran to risk losing its biggest customer in exchange for enacting revenge on America.
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.