Hormuz, the Strait for which Portugal fought, is at the centre of the markets’ attention
The Strait that sees 20% of the world's oil pass through, and which Iran could block, was conquered by Portugal in the 16th century for a similar reason -- as a trade route (in this case, for spices).
Portugal’s relationship with Hormuz was long and complex, from the initial (failed) invasion led by Afonso de Albuquerque in 1507, through the seizure of the city in 1515 to its fall to the Persians (allies of the British, supposed allies of Portugal) in 1622. But the objective was always clear: to control the strait that shares its name with the city, in order to control a crucial passage point for trade between India and Europe via the Persian Gulf.
If 518 years ago it was the transport of valuable spices and other exotic products from India that motivated wars between the Portuguese and the Ottomans, today it is the oil from the Persian Gulf that makes the Strait of Hormuz a crucial location in the escalation of yet another war in the Middle East: on 13 June, Israel began bombing various sites in Iran’s nuclear programme, with the US joining in on Saturday, bombing the same type of target.
Iran retaliated on Monday by firing missiles at the Al Udeid military base, the regional headquarters of the US central command, where around 9,000 US citizens work. On the markets, Brent crude prices fell by almost 7%. An unexpected reaction to an escalating conflict? Yes, but with a nuance. The relief in the markets, which may be temporary, came from the idea that Iran’s retaliation will be limited to military targets and not the blockade of the Strait of Hormuz.
Iran’s first reaction to the US attacks was for parliament to approve the blockade of the strait that separates the Persian Gulf from the Gulf of Oman and the rest of the world. The decision has yet to be approved by the Supreme National Security Council. It’s not certain that Tehran really wants to go down this road, but the mere option is causing nervousness in the markets.
Why? At 33 kilometres wide at its narrowest point, with a sea route only 3 kilometres wide in each direction, the strait is vulnerable to attack. And these would certainly have an impact on the oil market and the global economy, as around a fifth of the world’s total oil consumption passes through the strait.
Since the beginning of 2022 and last month, between 17.8 million and 20.8 million barrels of crude oil, condensate and fuels have passed through the strait every day, according to data from the analysis company Vortexa.
“Particular sensitivity”
“There could be particular sensitivity in the energy markets if access to the Strait of Hormuz is disrupted, given its importance as an oil transport route”, LLoyds Bank analysts warned in a note.
According to Reuters, at least two supertankers made U-turns near the Strait of Hormuz after the US military strikes on Iran, according to ship tracking data, as more than a week of violence in the region led vessels to accelerate, pause or alter their routes.
The blockade, which Iran could carry out by laying mines or attacking or capturing ships in the Gulf, a method it has used on several occasions in the past, could force diversions of routes, but not without consequences. “Even if there is scope for some flows to be diverted, an effective blockade of the Strait of Hormuz would lead to a dramatic change in the outlook for oil, pushing the market into a deep deficit”, said analysts at Dutch investment bank ING.
In addition, “OPEC’s excess production capacity would not help in this situation, since most of it is in the Persian Gulf, so these flows would also have to pass through the Strait of Hormuz”, the ING analysts also point out, noting that although higher oil prices will lead to an increase in drilling activity in the US, it will take time for this additional supply to reach the market. “And the volumes will not be sufficient to compensate for the losses in the Strait of Hormuz.”
“In the event of a successful blockade, we would expect to see Brent trading at up to 120 dollars in the short term”, a forecast that compares with the current 70.47 dollars. “A prolonged interruption (until the end of 2025) would probably lead to prices trading above 150 dollars, reaching new record highs”, they concluded.
