The oil market may face a new reality after the Iran war when exports through the Strait of Hormuz do not return to levels once considered normal, as ship owners now have to weigh the risk of a sudden war in the Persian Gulf.
And Western commercial ships will likely hesitate to pass through Hormuz if it remains under Iranian control, especially if they have to liaise with the Revolutionary Guard, risking violating American sanctions.
It is a situation with consequences that are difficult to foresee given the important role that Hormuz plays in global energy markets. Freedom of navigation in the strait was not seriously challenged until Iran closed the sea lane in response to the war launched by the US and Israel on February 28.
Iran’s blockade of Hormuz has caused the largest oil supply disruption in history, putting pressure on the US to make a deal as the threat to the world economy grows day by day. Tehran appears intent on using this ingredient to consolidate control over the strait in a solution that ends the war.
Middle Eastern leaders believe Iran has already taken control of Hormuz, said Amos Hochstein, who served as senior energy and national security adviser to former President Joe Biden.
“No matter what happens, the Iranians will control the Strait of Hormuz for the foreseeable future,” Hochstein told CNBC’s “Squawk Box” on Thursday. “It doesn’t matter what the deal is. Everyone in the district believes that.”
Oil tankers transiting through Hormuz before the war could be a top destination for the foreseeable future, said Helima Croft, head of global commodity strategy at RBC Capital Markets.
“Any end to the conflict that leaves Iran exercising control and operations over the Strait will result in dramatically lower flows in our view,” Croft told clients in a note on Thursday.
Traffic under this scenario could return to 60% to 70% of pre-war volume with ships allied to China moving freely while Western shipping requires bilateral agreements with Iran, said Richard Meade, chief editor of Lloyd’s List, at a May 21 briefing.
“This doesn’t cause an economic downturn the way some of the destruction scenarios we talked about earlier might suggest, but it doesn’t allow for a return to war,” Meade said. Lloyd’s List is one of the oldest shipping industry journals in the world.
“It produces something subtle,” Meade continued. “A two-sided strait forever where access is a function of political affiliation, not freedom of movement.”
The Red Sea Crisis
The crisis that disrupted shipping in the Red Sea shows how political instability can disrupt trade routes for longer than initially expected.
Houthi forces in Yemen allied with Iran began attacking commercial shipping in November 2023 in response to Israel’s war in Gaza. This attack began on November 19 with the hijacking of a cargo ship and 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, has fallen by more than half from 75 ships on Nov. 19, 2023 to 31 ships by January 30, 2024. After more than two years, the traffic in this problem still has not returned to the normal level.
One of the big lessons from the Red Sea crisis is that “you don’t need a big navy to cause a big disruption in the fishing industry,” 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 has not been enough for shipping to return to the levels seen in 2023, said Jack Kennedy, head of Middle East country risk at S&P Global Market Intelligence.
It is not certain that the collapse of traffic through Hormuz will last as long as the disruption in the Red Sea. Shipowners will have to decide whether they believe the US-Iran deal, once cemented, provides adequate security for commercial shipping.
The current freeze is likely to continue as the Trump administration appears to be prioritizing commercial shipping access through Hormuz, Kennedy said.
Even if Iran were to agree to open Hormuz without any transit conditions, it could take a long time to return to pre-war road levels, Kennedy said. There will be security concerns, for example, about mines that might be put into trouble, he said.
And there is a serious risk that war could resume next year unless a permanent solution to Iran’s nuclear and ballistic missile programs is found, Kennedy said. These are important issues, especially from the point of view of Israel’s national security, which led to the war, the analyst said.
Ship operators will have to assess whether they are willing to risk their ships and cargo being stranded on one side of the Strait of Hormuz for months if war breaks out again, Kennedy said.
Hormuz’s alternatives are several
But the Red Sea is also different in important ways from Hormuz, Raanan and Kennedy say. One of the reasons why traffic in the Red Sea is always congested is that ships can bypass it and avoid security risks by going around the Cape of Good Hope in South Africa. On the contrary, Hormuz is a base without similar alternatives, analysts say.
Hormuz is also more important to global energy markets than the Red Sea, they said. About 20% of the world’s oil and liquefied natural gas passed through Hormuz before the war.
Saudi Arabia and the United Arab Emirates use pipelines to divert millions of barrels of oil a day from the Persian Gulf to terminals in the Red Sea and the Gulf of Oman. These pipelines eased supply disruptions but did not fully compensate Hormuz.
“You can get some things out of the pipeline, but not everything can go right,” Raanan said. “We are not just talking about the oil that must come out of Hormuz.”
The whole point of LNG as a product, for example, can be loaded onto ships and transported around the world. Hormuz is also important for fertilizers and other things. If there are no other options, the hostages may have to accept and adapt to conditions in Hormuz in ways they did not in the Red Sea.
Still, Middle Eastern exporters are looking for alternatives. The UAE, for example, is accelerating the construction of a second pipeline through Hormuz. It is scheduled to be operational in 2027.
US Energy Secretary Chris Wright believes that the importance of Hormuz in the world energy market will decrease after the war, as Gulf countries such as the UAE build more pipelines to avoid it.
“This is a card you can play once,” Wright said of the Iran blockade. “There will be other energy routes out of the Persian Gulf.”
“We will see a decline in the importance of the Strait of Hormuz, but not a decline in the importance of energy production and energy supply for those countries,” he said.
