Is a closure in the Strait of Hormuz on the cards?

In a recent weekly report, shipbroker Intermodal said that “the Strait of Hormuz represents a vital artery for global trade, especially in the oil and gas industry. In this report, we will focus on how a potential blockage of the Strait of Hormuz (with its narrowest points at only 29 nautical miles) amidst increasing tensions in the Middle East could affect the gas industry and the extent to which such an event could occur. To provide a better perspective on the importance of this choke point, 20.0% of the global LNG trade (Qatar and U.A.E LNG exports) passes through the Strait of Hormuz, where there are no alternative routes (in contrast to the Abqaiq-Yanbu and Abu Dhabi crude oil pipelines)”.

According to Mr. Yiannis Parganas, Intermodal’s Head of Research Department, said that “more specifically, according to our estimations for 2023, both Qatar (the world’s third-largest LNG exporter) and the U.A.E exported a total of 113.81 bcm, which represents 20.0% of the global LNG trade (565.33 bcm). The export of this volume is covered by LNG vessels passing through the Strait of Hormuz given the limited capacity of the Qatar Dolphin pipeline (around 20.5 bcm annually). Meanwhile, Oman’s LNG export terminals are operating at close to 100% capacity, indicating that no further LNG exports can be accommodated. Asian countries are the primary importers of gas from Qatar and the UAE, accounting for nearly 80% of the total volume, with the European countries and the Kuwait importing the remaining share”.

Intermodal’s analyst added that “based on the aforementioned figures, it is clear that a potential disruption of LNG flows through the Strait of Hormuz would significantly impact global energy trade. A disruption could result in a daily loss of approximately 310 million cubic meters of LNG, and with liquefaction capacities outside the Persian Gulf nearly at their limits (as of 2023, Australia at 90%, the U.S. at 100%, Malaysia at 85%, and Russia exceeding its limits), this lost volume would be difficult to be replaced. Such an event would lead to extensive price volatility across all energy commodities—including gas, oil and its derivatives, and coal—and necessitate a redraw of trading patterns as Asian markets will seek to compensate for the lost exports from Qatar and the UAE. Spot LNG prices would likely soar as Asian countries will look to other markets, such as the U.S, which has closer trade ties with Europe. This shock could also force a reduction in gas-fired power generation, which cannot be easily compensated for by oil, as nearly 35% of the world’s crude oil trade also passes through the Strait of Hormuz. Coal might emerge as an alternative energy source, as seen during the 2022 Russia-Ukraine conflict when prices soared to unprecedented levels above $400 per ton for API2 CIF ARA, aligning with TTF prices above $330 per MWh which pushed the clean-dark spread into positive territory”.

“From our analytical perspective, we that the likelihood of such an action by Iran (first hinted at 20 years ago) remains low, especially given the significant dependence of Asian markets on Persian Gulf gas, and particularly for an extended time required for the global repercussions previously described to emerge. Unlike the recent disruptions in the Red Sea (where ships reroute through the Cape of Good Hope) and the sanctions against Russian oil and LNG exports (which led to new trading patterns), the Strait of Hormuz has no viable alternative routes. Additionally, oil exports account for approximately 20-25% of Iran’s GDP (with variations due to fluctuations in oil prices); thus, a blockade would severely impact its own economy”, Mr. Parganas concluded

Nikos Roussanoglou, Hellenic Shipping News Worldwide