Can anyone stop Iran’s oil chokehold?
Oil prices started the week with slight gains due to Iran-US threats and counter-threats in sanctions-related verbal exchanges that have kept the region and world at large on edge.
Oil prices were slightly up in the week ending July 27 with West Texas Intermediate (WTI) settling at $68.69 and Brent at $74.29.
New OPEC supply expectations to counter Iran sanctions on its oil exports and energy-related cuts due to multi-billion dollar trade wars between the US and China have kept the pressure on oil prices.
But all eyes are on US and allies options to protect shipping lanes from Iranian threats, according to a CNN report.
Who would potentially stop Iran?
The US said it would not tolerate any foreign entity or Central Bank still importing Iran’s oil exports oil, come November.
Forbes said that Iran’s associated $50 billion in annual revenues are at risk of plummeting and Tehran is now threatening to stop the flow of seaborne oil exports from the Middle East by blockading the Strait of Hormuz, a 21-mile-wide strategic choke point in the Arab Gulf.
“A recent oil industry analysis shows that if Iran chose to cordon off the strategic Strait of Hormuz, nearly 20 million barrels b/d of crude oil – roughly 40% of global seaborne oil exports – would stop flowing from the Arab Gulf,” said Forbes.
CNN reported that as tensions between the US and Iran ratchet up, the Trump administration is looking at what military options may be needed to keep vital waterways in the Middle East open in the wake of attacks on Saudi Aramco oil tankers by Iranian-backed Houthi rebels on July 25, quoting two administration officials.
“Both officials emphasize that if any military action is taken it would be carried out by US allies in the region, such as the Saudis, and not by US forces,” said Forbes, adding it is also not known if any action to keep the waterways open is imminent.
Saudi Aramco has stopped all oil shipments through the nearby Bab El-Mandeb strait, it said in a statement.
Defense Secretary James Mattis made clear the US is committed to keeping international oil shipping lanes open.
If the Iranians do move to shut down oil shipping directly, Mattis said: “it would have obviously an international response to reopen the shipping lanes with whatever that took because the world’s economy depends on that energy, those energy supplies flowing out of there.”
According to CNBC, former Adm. James Stavridis said that should Iran close the crucial Strait of Hormuz, the Navy is prepared to unblock it, quickly.
“In the event Iran chooses to militarily close the Strait of Hormuz the U.S. and our Arabian Gulf allies would be able to open it in a matter of days,” he told CNBC.
Tehran Times reported Iranian president Rouhani saying that Iran has control over other strategic places other than the Strait of Hormuz.
“One who understands politics even a little bit wouldn’t say ‘we will stop Iran’s oil exports’,” Rouhani is quoted as saying, in response to US sanctions.
Iran has threatened to close off the Strait on numerous occasions, including the Iran-Iraq war, but they’ve never actually followed through.
Other shipment options open
The suspension of oil shipments through the strait of Bab el-Mandeb coming shortly after a threat by Iran to shut the Strait of Hormuz raised concerns about oil trade.
Oil Price.com detailed the top 4 chokepoints that pose a risk to oil supplies.
Strait of Hormuz
Nearly a fifth of the oil trade, or nearly 19 million barrels per day (bpd) of crude oil, passes through the Strait of Hormuz, combined with nearly a third of global LNG supplies.
Saudi Arabia and the UAE each have pipelines that have the capability to ship oil outside of the Persian Gulf, circumventing the Strait of Hormuz.
Saudi Arabia has the nearly 750-mile Petroline (or East-West Pipeline), which runs across Saudi Arabia from the oil fields in the East linking it to tankers in the Red Sea at the Yanbu port towards the Suez Canal and the Mediterranean.
The pipeline system, consisting of two lines, has a capacity of 4.8 million bpd but according to S&P Global Platts, the system has a throughput of about 1.9 million bpd, which means that 2.9 m bpd of the system’s capacity sits idle.
In addition, the UAE has the Abu Dhabi Crude Oil Pipeline, which has a capacity of 1.5 million bpd and runs from the Habshan onshore field in Abu Dhabi to Fujairah on the Gulf of Oman, bypassing Hormuz. S&P Global Platts says about 0.5 m bpd is running through that line, with 1 million bpd of unused capacity.
Strait of Malacca
Over in Asia, the second largest chokepoint, the Strait of Malacca, is extremely narrow – just 1.7 miles wide at its narrowest point. Through that Strait more than 16 million bpd of oil travels. China is overwhelmingly dependent on the Strait, and this vulnerability has led to several Chinese initiatives to find alternatives.
The Suez Canal is a third major chokepoint, although the upside of this one is that it is located in a single country, not between multiple countries, such as the Straits of Hormuz and Malacca. Still, the canal cannot handle fully laden very large crude carriers (VLCCs), which means that some oil tankers have to offload their cargo onto the SUMED pipeline, which connects the Red Sea to the Mediterranean, bypassing the Canal. The SUMED Pipeline is the only alternative route, otherwise, tankers would have to travel around the southern tip of Africa, adding 2,700 miles to the trip for a tanker traveling from Saudi Arabia to the US.
There are not alternatives to the Strait of Bab el-Mandeb, expect for the aforementioned East-West pipeline in Saudi Arabia. A closure of the Strait would force tankers to travel around Africa’s southern coast.
“By and large, the alternative routes to these major chokepoints are only partial-solutions, if at all. The capacity to bypass some of the most vital bottlenecks remains relatively marginal. The oil trade is still highly dependent, and thus, highly vulnerable, to any lengthy outage,” said Oil Price.com.