As tensions rise over its nuclear program, Iran’s parliament has made a controversial move by approving a potential closure of the Strait of Hormuz, a critical maritime passage for global oil, experts told Finance Newso that such an action would greatly harm Iran itself.
The parliamentary decision follows recent U.S. military strikes on Iranian nuclear facilities, a development that could strain Iran’s relationships with neighboring countries and key trading partners.
The national security council will ultimately decide on the closure, a scenario that raises concerns over escalating energy prices and geopolitical instability, prompting the U.S. to urge China to ensure the strait remains open.
Vanda Hari, founder of the energy intelligence firm Vanda Insights, remarked on Finance Newso’s “Squawk Box Asia,” stating that the likelihood of Iran actually closing the strait is extremely low. “If Iran blocks the strait, it will likely turn its neighboring oil-producing nations against it, heightening hostilities,” she cautioned.
Moreover, restricting access would adversely impact Iran’s oil market, especially its exports to China, which heavily relies on Iranian crude. “The potential gains are minimal, while the self-inflicted damage could be significant,” Hari concluded.
Clayton Seigle, a senior fellow for Energy Security and Climate Change at the Center for Strategic and International Studies, pointed out China’s heavy dependence on oil imports from the Gulf region. He stated, “China’s national security interests would lean towards stabilizing the situation to ensure the safe passage of oil and gas through the strait.”
Currently, there are no indications of threats to commercial shipping in the region, as reported by the Joint Maritime Information Center. U.S. vessels have been able to transit the Strait of Hormuz without disruption, signaling stability for the foreseeable future.
Impact of potential disruptions
The Strait of Hormuz serves as the sole maritime route linking the Persian Gulf to the open ocean, with around 20% of the world’s oil passing through this critical chokepoint. The U.S. Energy Information Administration has labeled it the “world’s most important oil transit chokepoint.”
Bishop stated that Iran’s tactics in the region are unlikely to be an outright blockade; rather, they could fluctuate along a spectrum from minor disruptions to total blockage. He suggested that Iran might aim to create modest price increases to trouble the U.S. without inciting a full military response.
On Sunday, Patrick De Haan, head of petroleum analysis at GasBuddy, indicated rising pump prices in the U.S. could see a climb to between $3.35 and $3.50 per gallon shortly, compared to the national average of $3.139 noted for the week of June 16.
Should Iran opt to close the strait, analysts predict it would use small vessels to impose a partial blockade or might resort to laying mines for a more comprehensive closure, according to David Roche, strategist at Quantum Strategy.
Research from S&P Global Commodity Insights explained that if Iran were to close the strait, not only would its own oil exports be affected, but so too would the shipments of neighboring Gulf nations, including Saudi Arabia, the UAE, Kuwait, and Qatar. Such a move could potentially take over 17 billion barrels of oil off the global market and cause significant ripples in regional refinery operations, leading to feedstock shortages across Asia, Europe, and North America.
Additionally, natural gas exports from Qatar could face severe consequences, with an estimated 77 million metric tons annually at risk of not reaching critical markets in Asia and Europe due to potential disruptions.
With limited alternative routes for Middle Eastern oil and gas, any disruptions in the Strait of Hormuz could have far-reaching implications, as highlighted by the Commonwealth Bank of Australia. The current pipeline capacities within Saudi Arabia and UAE barely suffice to meet half the daily shipments that transit through the strait.
The potential for increased energy prices looms large, with Goldman Sachs noting that the market has already begun to price in a geopolitical risk premium of $12. The analysis suggests that if oil flow through the strait were to drop by 50% for a month, followed by a sustained 10% reduction for 11 months, Brent crude could briefly reach approximately $110 per barrel.
As of now, Brent oil futures are priced at $78.95 per barrel, while West Texas Intermediate futures stand at $75.75.
