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Global oil markets have recorded some of the biggest price swings in history this week after the US-Israeli war with Iran throttled the flow of Middle Eastern crude through the strait of Hormuz.
The narrow waterway south of Iran is one of the world’s most important trade arteries, through which a fifth of global oil and seaborne gas is shipped from production facilities and refineries in the Gulf to buyers around the world.
The strait carries just over 20m barrels of oil a day, making it the busiest oil route after the strait of Malacca between Malaysia and Indonesia. It is also the most important trade route for cargoes of liquified natural gas (LNG), shipped on super-chilled tankers.
But unlike the Malacca corridor – which carries roughly 23.2m barrels a day to buyers in China, Japan and South Korea – the Hormuz strait is far more difficult to circumvent, making it the biggest chokepoint in the global energy system.
The waterway lies below Iran and above Oman to the south, tapering to just 21 miles wide at its narrowest point. It is through this passage that crude and petroleum products from the refineries and production facilities of the world’s biggest petrostates need to pass to reach their global market.
Saudi Arabia, the UAE and other Gulf producers have built pipelines that are able to bypass the strait, but these routes can carry only a fraction of the region’s export capacity.
Iran has weaponised its geography in retaliation to US-Israeli strikes. Hundreds of tankers hoping to cross the strait have come to a halt after the Islamic Revolutionary Guards Corps threatened to “set ablaze” any vessel using the trade route, effectively deterring all but the most reckless.
The stoppage has sent fossil fuel prices soaring, and fears over supplies have been compounded by strikes against key oil and gas infrastructure in the region that threaten to further disrupt supply even if tankers are able to resume their routes through the strait.
At least five energy sites in and around Tehran were hit by airstrikes, prompting accounts of “apocalyptic” scenes in the Iranian capital. Major oil infrastructure in Saudi Arabia and Qatar have also been affected.
Meanwhile, oil storage facilities in Saudi Arabia, the United Arab Emirates and Kuwait are reaching their limits, meaning large oilfields may need to be shut down if crude cannot be exported via the strait of Hormuz to the global market.
Qatar’s energy minister has predicted that if the disruption to Hormuz continues all Gulf energy exporters will have to shut down production within weeks – delaying any restart if the strait reopens – and oil could rise to $150 a barrel.
The single largest buyer of crude flowing through the strait is China, which imported at least 5.4m barrels of crude a day on tankers traversing the channel last year, according to Vortexa. These included record volumes of sanctioned Iranian crude, which averaged 1.38m barrels a day last year.
Although China is the most exposed to the Gulf energy crisis, it is also the most prepared. In addition to record Iranian imports, market observers believe it imported record volumes of Venezuelan crude before the US swoop on the South American country in January.
Overall, China has taken advantage of weak oil prices over recent years to quietly amass record high levels of crude stocks, which are estimated to exceed 1.2bn barrels in its onshore crude stockpiles. This is the equivalent of about three to four months of reserves. While China is also the biggest importer of Gulf gas cargoes, it relies on the region for less than a third of its total gas demand. Its other gas sources include Russia and Australia.
The countries most reliant on the Middle East for gas imports include Pakistan, Bangladesh and India, the world’s fastest growing major economy. The White House agreed last week to temporarily waive its sanctions to allow India to buy Russian oil stranded at sea. In Bangladesh and Pakistan ministers have clamped down on the countries’ electricity and fuel use by shutting universities and preparing remote-work policies.
Leaders of G7 nations met on Monday to discuss plans to reverse the sharp rise in global energy prices after the international benchmark Brent crude, climbed by almost a third to highs of $119.50 a barrel. It was the first time market prices have soared above the key psychological $100 threshold since Russia’s invasion of Ukraine.
However, by the evening prices were tumbling again after Donald Trump suggested the US-Israel war on Iran could end “very soon”, and by Wednesday they had fallen to about $90 a barrel.
