All eyes on Hormuz as strikes jolt energy markets

The Strait of Hormuz normally carries about 15 million barrels per day of crude oil, 5.5 million bpd of refined products, and 82.6 million tonnes of LNG annually — around 20% of global oil supply and 16% of LNG.

With the vital oil shipping channel all but shut since the US and Israel began their war against Iran, US President Donald Trump has urged other nations to send warships to the Gulf to help secure and reopen the Strait and end the disruption to global shipping and energy supplies.

The complete closure of the Strait of Hormuz for an extended period could put global energy supplies into a chronic situation of disruption, interruptions and expense. The Gulf has also become a key refining hub with major recent expansions in Iraq, Kuwait, Bahrain, the UAE and — albeit outside Hormuz — Oman. The Gulf provides about 10% of global gasoil and 20% of global jet respectively (this includes approximately 30% of Europe’s jet needs).

A lengthy stoppage would therefore affect many other products. The Gulf region is a crucial exporter of liquefied natural gas (LNG), with about 16% of world supply, mostly from Qatar. Europe is emerging from a cold winter with very depleted gas stocks. This year is set to be a very strong one for LNG supply growth, with new projects in the US, Canada and elsewhere adding some 39 million tonnes per day of capacity. Qatar was meant to be a major part of the LNG supply growth this year and, especially, next. A long disruption to shipping has stranded this LNG in the Gulf and may push back completion of its three massive expansions of its North Field. The Gulf countries, including Iran, are also major suppliers of liquefied petroleum gas (LPG), nitrogen-based fertilisers, petrochemicals, methanol, aluminium and helium.

Pipeline contingency plans

Both Saudi Arabia and the UAE have alternative shipping routes at their disposal, partially mitigating the impact of disruption.  According to the US Energy Information Administration (EIA), about 2.6 million barrels per day (bpd) of unused capacity from existing UAE and Saudi pipelines could be available to bypass the Strait of Hormuz.

The outlook for oil

According to Oxford Economics, if global oil prices average around $100 per barrel for two months, it would shave a few 10ths of a percentage point off global GDP growth via higher inflation. However, an average price of around $140 per barrel for two months would be enough to push parts of the global economy into a mild recession. World CPI inflation would spike, peaking at 5.8%.

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Stranded tankers to dilute SPR impact

A historic release of 400 million barrels of crude from G7 strategic reserves would equal 30% of the 1.2 billion barrels held by IEA members in public emergency stocks. But IEA releases have never exceeded 2 million barrels per day, and the largest single-week drawdown in 2022 was 8.4 million barrels. More than 200 crude and product tankers are also stranded in the Gulf, according to Lloyd’s List Intelligence, including the same Atlantic basin fleet needed to move SPR barrels to Asia amid the Hormuz closure, war risk insurance withdrawal, and physical danger.