Global oil markets recorded their biggest price swings in history this week after the US-Israeli war on Iran blocked the flow of Middle Eastern crude through the Strait of Hormuz.
The narrow waterway south of Iran is one of the world’s most important trade arteries, through which one-fifth of the world’s oil and marine gas is transported from production facilities and refineries in the Gulf to buyers around the world.
The strait carries just over 20 million barrels of oil per day, making it the second busiest oil route after the Strait of Malacca between Malaysia and Indonesia. It is also the most important trade route for liquefied natural gas (LNG) cargoes transported by cryogenic tankers.
But unlike the Strait of Malacca, which transports about 23.2 million barrels a day to buyers in China, Japan and South Korea, the Strait of Hormuz is much more difficult to bypass, making it the largest gateway to the global energy system.
The waterway lies beneath Iran and above Oman to the south, and is only 21 miles wide at its narrowest point. Crude oil and petroleum products produced at the refineries and production facilities of the world’s largest oil companies must pass through this passage to reach global markets.
Saudi Arabia, the UAE and other Gulf producers have built pipelines to bypass the strait, but these routes can deliver only a fraction of the region’s export capacity.
Iran weaponized geographies in retaliation for U.S. and Israeli airstrikes. Hundreds of oil tankers attempting to cross the strait were halted after the Islamic Revolutionary Guard Corps threatened to “burn” all ships using the trade route, effectively stopping all but the most reckless vessels.
The disruption has sent fossil fuel prices soaring and fears over supplies have been compounded by strikes on key oil and gas infrastructure in the region that threaten to further disrupt supplies even if tankers are able to resume their routes through the strait.
At least five energy facilities in and around Tehran were damaged in airstrikes, sparking descriptions of “apocalyptic” scenes in the Iranian capital. Critical oil infrastructure in Saudi Arabia and Qatar was also affected.
Meanwhile, oil storage facilities in Saudi Arabia, the United Arab Emirates and Kuwait are reaching their limits. This means that large oil fields may have to be shut down if crude oil cannot be exported to global markets through the Strait of Hormuz.
Qatar’s energy minister predicted that if chaos in Hormuz continues, all Gulf energy exporters will have to halt production within weeks, delaying the restart once the strait reopens, and oil could rise to $150 a barrel.
The biggest buyer of crude through the strait is China, which imported at least 5.4 million barrels of crude per day via tankers through the strait last year, according to Vortexa. This included a record amount of Iranian crude oil, averaging 1.38 million barrels per day last year.
China is the most exposed to the Gulf energy crisis, but also the best prepared. In addition to record imports of Iranian crude, market observers believe Iran also imported record amounts of Venezuelan crude before the U.S. attack on the South American country in January.
Overall, China has taken advantage of falling oil prices in recent years to quietly build up record-high crude oil inventories, estimated to exceed 1.2 billion barrels in domestic crude reserves. This equates to approximately 3-4 months of reserves. China is also the largest importer of Gulf gas cargoes, but relies on the region for less than a third of its total gas needs. Other gas sources include Russia and Australia.
Countries most dependent on the Middle East for gas imports include Pakistan, Bangladesh and India, all of which are among the world’s fastest-growing major economies. The White House agreed last week to temporarily waive sanctions to allow India to buy Russian oil stranded at sea. Ministers in Bangladesh and Pakistan have clamped down on their countries’ power and fuel use by closing universities and preparing remote work policies.
Leaders of the Group of Seven countries met on Monday to discuss plans to reverse a sharp rise in global energy prices after international benchmark Brent crude rose by nearly a third to a record high of $119.50 a barrel. This is the first time since Russia’s invasion of Ukraine that market prices have soared above $100, a key psychological threshold.
But oil prices tumbled again by evening, falling to around $90 a barrel on Wednesday after Donald Trump suggested the US-Israel war with Iran could end “very soon.”