The conflict in the Middle East has been the most important issue in recent days after the escalation experienced last Tuesday, when Iran, in response to the Israeli invasion of Lebanon, launched a missile attack on Tel Aviv. The situation at the moment is one of tense calm awaiting Israel’s response. Netanyahu seems to be receiving strong pressure to attack key points in Iran’s economy and it is not ruled out that he could make a decision in the next few hours.
In this scenario, one of the main focuses of attention for the market is oil, which has been impacted by the growing tension in the area. In recent months, the price of a barrel has suffered from disagreements between OPEC members, the fall in global demand and the possible victory of Donald Trump in the next elections. However, instability in the Middle East has once again boosted the price of oil: after the Iranian attack on Tuesday, the price of oil rose by more than 4%, a trend that continued the following day, when it rose by another 2%.
Behind these increases lies a fear: a possible blockage of the Strait of Hormuz, one of the most important oil transport hubs in the world. But what role does this strait play and how can it affect the price of oil?
Brent crude prices have increased by over 6% since the beginning of the current conflict between Israel and Iran. Historically, the impact of such events has been limited due to a lack of escalation. However, the possibility of Israeli retaliatory actions this weekend cannot be ruled out, which could lead to a larger shock in the financial markets. Source: Bloomberg Finance LP, XTB
What is the Strait of Hormuz?
The Strait of Hormuz is one of the most important and strategic maritime passages in the world and one of the most important hubs for oil transport on a global scale. Located between Oman and Iran, and just three kilometers long, this strait connects the maritime passage of the Gulf countries (Iran, Kuwait, Saudi Arabia, Bahrain, Qatar and the United Arab Emirates) with the Arabian Sea and other regions beyond and serves as a junction between Middle Eastern oil producers and key markets in Asia Pacific, Europe and North America.
Iran is responsible for only about 3 million barrels per day of production and 1.7 million barrels per day of exports. The key question regarding oil is whether the Strait of Hormuz, which handles 20% of the world’s oil supply, will be blockaded. Source: Bloomberg FInance LP, XTB
Why is the Strait of Hormuz so important for oil production?
The Strait of Hormuz is one of the main maritime trade routes on a global scale. In fact, it is estimated that this strait is responsible for around 11.1% of the world’s maritime trade. In the case of oil, however, this influence is even greater. According to the latest data from the IEA (International Energy Agency), it is estimated that approximately 30% of total world oil trade passes through this area, although between January and October 2023 this figure rose to almost 40%.
According to data from the US Energy Information Administration (EAI), around 21 million barrels of oil per day passed through the Strait of Hormuz in 2022, equivalent to 21% of global consumption of petroleum liquids. Between 2022 and the first half of 2023, the flow of oil through this channel accounted for more than a quarter of the total oil traded by sea in the world. And if the volumes of oil, crude oil and condensate that passed through the Strait of Hormuz between 2020 and 2022 are added, the total number of barrels rises to more than 2.4 billion barrels per day, figures that highlight the enormous weight that this enclave has in the global crude oil trade.
The Strait of Hormuz is the main export route for oil from Iran, Saudi Arabia, Iraq, the United Arab Emirates, Kuwait and Qatar. These exports are mostly directed to Asia, and in particular to China, Japan and India, although after the war in Ukraine and sanctions against Russia, the Strait has also gained weight in European crude oil imports: specifically, it is estimated that around 5% of the oil flow that passes through the Strait of Hormuz is now directed to Europe, which is equivalent to approximately 900,000 barrels per day. Before the Russian-Ukrainian conflict, these imports were equivalent to around 700,000 barrels per day, which means that Europe has increased its oil imports by approximately 25%.
In addition to oil, the Strait of Hormuz also plays a significant role in the transport of other raw materials, such as propane or natural gas. In the case of propane, it is…
Read More: Could a blockade of the Strait of Hormuz drive oil prices above $100?