Oil exports through Hormuz might not return to levels before Iran war

In the wake of the Iran war, the oil market may face a new reality in which exports through the Strait of Hormuz do not return to levels once considered normal; because shipowners now have to weigh the risk of a sudden conflict in the unstable Persian Gulf.

And Western merchant ships will be hesitant to pass through Hormuz if Hormuz remains under Iran’s de facto control, especially if they have to coordinate with the Revolutionary Guard, putting them at risk of violating U.S. sanctions.

This is a scenario whose consequences are difficult to predict, given the vital role that Hormuz plays in global energy markets. Freedom of navigation through the strait had never been seriously challenged until Iran completely closed the sea lane in response to the war launched by the United States and Israel on February 28.

Iran’s blockade of Hormuz triggered the largest oil supply disruption in history and put pressure on the United States to make a deal as the threat to the global economy grows by the day. Tehran appears intent on using this influence to solidify its control over the strait through a solution that would end the war.

Amos Hochstein, who served as former President Joe Biden’s senior energy and national security adviser, said Middle East leaders believe Iran has already taken control of Hormuz.

“No matter what happens, the Iranians will control the Strait of Hormuz for the foreseeable future,” Hochstein told CNBC’s “Squawk Box” on Thursday. he said. “It doesn’t matter what is written in the agreement. Everyone in the region believes it.”

Helima Croft, head of global commodity strategy at RBC Capital Markets, said oil tanker traffic at Hormuz before the war could represent a peak for transits in the foreseeable future.

“Any cessation of conflict that would result in Iran gaining operational control and influence over the Strait would, in our view, result in significantly reduced flows through the waterway,” Croft told clients in a note on Thursday.

Richard Meade, editor-in-chief of Lloyd’s List, said in a May 21 briefing that under this scenario, traffic could return to 60 percent to 70 percent of pre-war volumes, with China-bound ships moving freely, while the passage of Western ships would require bilateral agreements with Iran.

“This doesn’t trigger a recession in the way that some of the doomsday scenarios we’ve talked about before might suggest, but it doesn’t allow for a pre-war recovery either,” Meade said. he said. Lloyd’s List is one of the oldest maritime industry trade journals in the world.

“It produces something more insidious,” Meade continued. “A permanently bifurcated strait where access is a function of political harmony, not freedom of navigation.”

red sea crisis

The crisis restricting shipping traffic in the Red Sea shows how geopolitical instability can disrupt commercial passages for much longer than initially expected.

Houthi militants in Yemen, allied with Iran, began attacking commercial ships in November 2023 in response to Israel’s war in Gaza. The attacks, which started with the hijacking of a cargo ship on November 19, continued with missile and drone attacks for two years.

Daily traffic in the Bab el-Mandeb Strait, which connects the Red Sea to the Gulf of Aden, decreased by more than half, from 75 ships on 19 November 2023 to 31 ships as of 30 January 2024. More than two years later, traffic in the Bosphorus has still not returned to levels once considered normal.

One of the key lessons from the Red Sea crisis is that “you don’t need a huge navy to create major disruption at a choke point at sea,” said Tomer Raanan, a maritime risk analyst at Lloyd’s List.

The Houthis have not attacked a ship in the Red Sea since the end of last year, but that is not enough for ship traffic to return to levels seen in 2023, said Jack Kennedy, head of Middle East country risk at S&P Global Market Intelligence.

It is unclear whether the collapse in traffic through Hormuz will continue until the disruption in the Red Sea. Shipowners will have to decide whether they believe the US-Iran agreement, if truly consolidated, provides adequate safety guarantees for commercial ships.

Kennedy said the current ceasefire is likely to continue for now as the Trump administration prioritizes increasing access to commercial ships through Hormuz.

Even if Iran agreed to open Hormuz without any transit conditions, it would likely take a long time to return to pre-war traffic levels, Kennedy said. For example, he said there would be security concerns about the mines laid in the Bosphorus.

Kennedy said there was a serious risk that the war would continue next year unless a permanent solution to Iran’s nuclear and ballistic missile programs was found. The analyst said these were the fundamental issues that led to the war, especially from an Israeli national security perspective.

Kennedy said ship operators must weigh whether they want to risk having their ships and assets stranded on one side of Hormuz for months if war breaks out again.

Several Hormuz alternatives

But Raanan and Kennedy said the Red Sea differs from Hormuz in important ways. One reason why Red Sea traffic remains sluggish is that ships can bypass the route by going around the Cape of Good Hope in South Africa and avoid the security risk altogether. By contrast, Analysts say, Hormuz is a transit point with no equivalent alternative.

They said Hormuz was much more important to global energy markets than the Red Sea. Approximately 20% of the world’s oil and liquefied natural gas supply passed through Hormuz before the war.

Saudi Arabia and the United Arab Emirates use pipelines to route millions of barrels of oil a day from the Persian Gulf to export terminals in the Red Sea and Gulf of Oman. These pipelines have eased the supply disruption but cannot fully compensate for Hormuz.

“You can get some things out of pipelines, but not everything can go through a pipeline,” Raanan said. “We’re not just talking about the oil that needs to come out of Hormuz.”

For example, the main purpose of LNG as a product is that it can be loaded onto ships and transported anywhere in the world. Hormuz is also vital for fertilizer and other commodities. In the absence of alternatives, shippers may be forced to accept and adapt to conditions in Hormuz in ways they do not in the Red Sea.

Middle Eastern exporters are still looking for more alternatives. For example, the UAE is accelerating the construction of a second pipeline that will bypass Hormuz. It is planned to become operational in 2027.

US Secretary of Energy Chris Wright believes that the importance of Hormuz to the global energy market will decrease after the war as Gulf countries such as the UAE build more pipelines to avoid war.

“It’s a card you can play once,” Wright said of the blockade of Iran. “There will be other ways to get energy from the Persian Gulf.”

“We will see the importance of the Strait of Hormuz decrease, but we will see that the importance of the energy production and energy supply of these countries does not decrease,” he said.