What if Iran closes the Strait of Hormuz?
|The Strait of Hormuz is one of the key global energy gateways. App. 20 million barrels of oil flows through the strait every day. That is the equivalent of 30% of global seaborne oil trade, and roughly 20% of global petroleum liquids consumption. Most of the oil (84% according to the EIA) is destined to Asia. China, India, Japan and South Korea are the biggest buyers that accounted for 69% of all Hormuz crude oil and condensate flows last year.
The strait is not only important for oil trade, but even more so, for LNG trade. LNG flows through the SOH amount to 10-11 billion cubic feet per day, equivalent to ~20% of global LNG trade. All of LNG exports from Qatar and the UAE transit via the strait. A closure would also impact Europe's energy supplies. In 2024, Qatar was the EU's fourth largest supplier of LNG with a 4.3% share of the total.
If the Strait of Hormuz became non-navigable, it would constitute pretty much an unprecedented negative supply shock for the energy markets at least in recent history. In the last 50 years, the largest oil supply disruptions have been triggered by the 1) Houthi attacks on Saudi oil fields in 2019 (-5.7 Mb/d), 2) Iranian revolution in 1978-79 (-5.6 Mb/d) and 3) the Kuwait invasion in 1990-91 (-4.3 Mb/d).
Only a small share of the total volume could find alternative routes. The EIA estimates that pipelines in Saudi Arabia and the UAE could mitigate minor disruptions as probably 2.6 million barrels / day could be rerouted via those. Hence, in case of a full stop to traffic, world oil supply would suddenly fall by more than 18 million barrels / day, or by almost 20%. That is a substantially larger shock than the three shocks mentioned above where supply fell by 5-8%. For LNG, there is no alternative route, and hence, the impact would be similarly severe for the global gas market.
Iran has a number of ways to disrupt traffic on the strait. Reportedly, it has already resorted to GPS jamming and other less severe forms of harassment. On Thursday, two oil tankers collided in the Gulf of Oman and the UAE blamed for navigational errors.
Iran could choose to target vessels navigating via the Gulf directly by attacking them with drones or missiles. Doing so would likely lead to a US intervention, and such attacks would likely be mitigated quite fast, possibly in a few days. However, insurance companies might be wary of issuing insurances for as long as open conflict on the strait would remain.
Iran could also sink a ship or place mines in the sea. In both of these cases, disruptions would likely be longer and more severe than under the first options.
In our view, closing the Strait of Hormuz is the last option that Iran would resort to as it would certainly provoke a strong US military response, and also because its domestic economy relies on it. However, desperate times lead to desperate action, and if the Supreme Leader Ali Khamenei felt that he had nothing to lose anymore, he might choose to go all in.
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