Understanding in One Article: How Important is the Strait of Hormuz to the Global Energy Market?

With the outbreak of conflicts between Israel and Iran, there is renewed concern about the security of the Strait of Hormuz, a vital global energy artery.

After Israel's attack on Iran, Iranian officials have hinted at the possibility of closing the Strait of Hormuz, a statement that once triggered a sharp spike in international crude oil prices.

Why is the Strait of Hormuz crucial to the global energy market?

The Strait of Hormuz is a waterway connecting the Persian Gulf and the Indian Ocean, and it is the only access point to the Persian Gulf.

(Satellite image)

This narrow waterway is only 29 nautical miles wide at its narrowest point, yet it carries nearly one-third of the world's seaborne crude oil shipments and one-fifth of the global liquefied natural gas (LNG) shipments. The US Energy Information Administration (EIA) refers to it as the "world's most important oil chokepoint."

According to the International Energy Agency (IEA), approximately 20 million barrels of crude oil and refined products passed through the Strait of Hormuz daily in 2023, accounting for nearly 30% of the world's total oil trade. About 70% of this volume was destined for the Asian market, with major buyers including India and Japan.

Despite the existence of alternative pipeline transportation options, their capacities are limited. The IEA estimates that the current oil transportation capacity diverted via land routes is only 4.2 million barrels per day, such as Saudi Arabia's "East-West Pipeline" (leading to the Red Sea) and the UAE's "Abu Dhabi Crude Oil Pipeline" (leading to Fujairah). The transportation capacity of these alternative routes accounts for only about a quarter of the normal volume carried through the Strait.

The LNG market's reliance on the Strait of Hormuz is even higher. All exports from Qatar, the world's second-largest LNG exporter, and the UAE must pass through this strait.

The IEA states that in the first 10 months of 2023, a total of 90 billion m³ of LNG was transported through the Strait, accounting for 20% of global LNG trade.

Given that there are few viable alternative routes for Qatar and the UAE's LNG exports, any shipping disruptions would severely tighten global supply. About 80% of LNG exports are headed to Asia, while Europe receives approximately 20%, meaning that in a tight market, such disruptions would further exacerbate regional competition.

How high could oil prices rise if the Strait of Hormuz is blocked?

Although a full blockade of the Strait of Hormuz by Iran is still considered a low-probability event, analysts generally believe that the mere existence of this threat is enough to cause significant volatility in the energy market.

Goldman Sachs has warned that in an extreme risk scenario, if the Strait of Hormuz experiences a prolonged blockade, international oil prices could surge significantly above $100 per barrel.

The bank estimates that Iran's current daily crude oil production is approximately 3.6 million barrels, with daily condensate production at around 800,000 barrels, and average seaborne exports averaging 2.1 million barrels per day since the beginning of the year.

Warren Patterson, Head of Commodities Strategy at ING, stated that given the latest developments, the market has begun to factor in a higher geopolitical risk premium.

Patterson pointed out that even a disruption in Iran's oil exports alone would be sufficient to overturn the previously anticipated crude oil supply surplus in the market, potentially driving Brent crude oil prices up to $80 per barrel.

He warned that a more severe scenario, such as a disruption in shipping through the Strait of Hormuz, could have far more profound implications.

"Nearly one-third of the world's seaborne oil passes through this strategic chokepoint," Patterson said. "If there were significant disruptions to these shipments, oil prices could surge to $120 per barrel, especially since most of OPEC's spare capacity is located in the Persian Gulf region and would be difficult to mobilize in such a scenario."

He added, "An escalation of the situation would also impact the European natural gas market."