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How a 3-km-wide shipping lane is threatening the global oil market

An oil tanker after being attacked near the Strait of Hormuz, on Thursday. Crude oil prices had shot up briefly after the incident Photo: Reuters
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The Strait of Hormuz, sometimes described as the world’s most important oil choke point, is a gateway for almost a third of all crude oil and other petroleum products carried by tanker.

But it is also an increasingly dangerous place because of recent attacks on tankers, raising fears that the route is vulnerable to assaults that could threaten and destabilise oil prices. After the apparent attack on Thursday on two tankers just outside the strait, tanker operators were quick to voice concerns.

“We have people of every nationality and vessels of every flag transiting that crucial sea lane,” said Paolo d’Amico, chairman of the International Association of Independent Tanker Owners. “If the waters are becoming unsafe, the supply to the entire Western world could be at risk.”

A passage just two miles wide

The oil-producing countries around the Persian Gulf, including Kuwait, Saudi Arabia, Iraq and Iran, are crucial for supplying the world oil market. Most of their exports, around 18 million barrels a day or about 20 per cent of world demand, must travel through the Strait of Hormuz.

The strait, separating the United Arab Emirates, Oman and Iran, is 21 miles wide at its narrowest point, but the width of the shipping lane in either direction is only two miles wide, according to the United States Energy Information Administration. Dozens of ships a day move through the passage.

The bulk of this traffic heads for Asian markets like China, India and Japan. Large volumes of liquefied natural gas, an increasingly important fuel, follow the same route from the tiny emirate of Qatar.

But this area has been rocked by instability in recent weeks. In May, there were reports that four oil vessels were attacked near the Strait of Hormuz, heightening concerns over rising tensions between Iran and the United States. A day later, a drone strike on oil pipelines, claimed by Houthi rebels, forced the Saudis to suspend the flow of oil to the western side of the country.

On Thursday, two more tankers were rocked with explosion and fire near the strait. At least one vessel was set ablaze, and crews were forced to abandon ship.

Iran’s coastline covers much of the east side of the gulf, and analysts say that, as the US tightens sanctions on Iran, Tehran would be well placed to harass shipping with small boats, missiles, mines and other weapons.

Experts doubt that the Strait of Hormuz could be shut down, in part, because the US Navy maintains a robust presence in the region.

Helima Croft, global head of commodity strategy at RBC Capital Markets, an investment bank, notes that the Iranians have been mentioned as possible suspects behind the attacks and that they may consider such tactics an appropriate response to the sanctions, which “are viewed from Tehran as economic warfare designed to elicit regime change.”

Analysts say that whoever was behind the recent attacks may be trying to make the point that there is no way around the gulf routes. The reports of attacks in May on four ships occurred in waters off Fujairah, an important port on the Gulf of Oman with facilities designed to bypass the straits.

Saudi does have a safety valve in case the strait became too dangerous: an East-West pipeline that could carry crude to the port of Yanbu on the Red Sea coast. But the drone attack claimed by the Houthi rebels managed to briefly shut that route down.

So far, oil markets have largely taken the attacks in stride, although “the fact that we have had a second series of incidents has definitely heightened concern,” said Richard Mallinson, an analyst at Energy Aspects, a market research firm.

Brent crude rose about 3.5 per cent on Thursday to more than $61 a barrel, but remains well below recent highs of about $72 in mid-May.

Analysts say that traders are probably betting that the smoldering tensions will not burst into a full-blown conflict. Another factor is that slowing growth in the world economy, weighed down by trade tensions between the United States and China, has weakened demand for oil.

And then there is the American resurgence in production to consider. There is a sense, Ms. Croft said, that the shale oil boom in the United States, where oil production grew an extraordinary 17 percent last year, can compensate for any jolts in world oil supply.

Ms. Croft worries that a major conflict or a cyberattack that shuts off a large portion of Gulf exports could prove a rude awakening.

“There is no way the market is insulated from that because of US shale,” she said.
Strait of uncertainty

The strait lies between Oman and Iran

It is 33-km wide at its narrowest point, with the shipping lane just 3-km wide in either direction

Almost a fifth of the world’s oil passes through the Strait

The US has imposed sanctions on Iran, aimed at halting its oil exports

Iran has threatened to disrupt oil shipments through the Strait if the US tries to strangle its economy

Source: Business Standard