Tehran closes Hormuz strait, attacks oil, gas facilities

Iran is bringing the big guns on the third day of the conflict, announcing the dreaded closure of the Strait of Hormuz and threatening to “set on fire” any ships that insist on crossing the strait.

Hostilities had already severely undercut passage through the corridor, paralyzing regional energy logistics and threatening a total production shut-in within weeks. With the world’s most vital oil artery blocked, the logistical challenge has shifted from delays to a question of physical storage capacity. The conflict is spilling across the region, threatening the 21 mn barrels of oil from Iran, Iraq, Kuwait, Saudi Arabia, and the UAE that pass through the strait daily.

Iran also waged limited strikes on an oil refinery in Saudi and LNG export facilities in Qatar. Attacking core energy infrastructure is the nightmare scenario traders fear, forcing the market to price not only geopolitical risk but also potential physical disruption at the heart of export capacities.

Hormuz closure can send oil flying

Oil touching the psychologically important USD 100 per-barrel mark is looking more possible with each passing day, with JPMorgan Chase & Co analysts warning in a note that Gulf producers only have 25 days before they run out of storage space. Wood Mackenzie said in a note that prices could exceed the USD 100 mark “if tanker flows are not quickly restored,” while Bernstein sees Brent crude reaching USD 150 in the event of a prolonged conflict.

The situation “has already moved from geopolitical noise to actual impact,” Rabobank Energy Strategist Florence Schmit tells EnterpriseAM, as energy infrastructure across the region has been targeted and Israel has already curtailed gas production as a precaution.

With the Hormuz Strait effectively closed, there are few other options to get output to global markets, with the Saudi East-West pipeline moving 5 mn bbl / d — equivalent to just a quarter of what usually passes through the strait.

The cost of LNG and our reliance on it could also soon become a serious issue, with QatarEnergy announcing yesterday that it has stopped producing LNG. The decision came following an Iranian drone that hit Ras Laffan, the world’s largest export facility, which produces some 20% of global supply.

As disruptions continue, the mismatch between demand and supply will rise along with prices. “It’s a matter of the duration of this crisis,” Wideangle LNG Consulting Director Jean-Christian Heintz tells us. “As a rule of thumb, if we are talking about one week of shortage, you see that this already translates into 2% of annual LNG production.”

LNG flow disruptions are expected to “reignite competition between Asia and Europe for available cargoes,” according to Wood Mackenzie Gas and LNG Research Vice President Massimo Di Odoardo.

Shipping rates for all types of goods and the end-cost for consumers are likewise set to rise, with shipping lines facing higher fuel costs — which usually account for 40% of total costs — and war-risk premiums doubling to 0.5% coming on top of a 15-20 days longer transit around the Cape of Good Hope while lines avoid the Suez Canal. There are also limited overland corridors able to handle anywhere near the amount of TEU capacity and diverted traffic.

Oil refinery under attack

Aramco halted operations at some units of the Ras Tanura refinery following a drone strike in the area. Debris from two intercepted drones fell near the facility, causing a fire that was contained, unnamed Energy Ministry sources told state news agency SPA, adding that oil supplies to local markets remain unaffected.

This is the first confirmed direct strike on oil infrastructure since hostilities began on Saturday. The 550k bbl / d facility — one of the Kingdom’s largest — sits on the Arabian Gulf, directly exposed as maritime traffic through Hormuz Strait grinds to a near-halt.

This could be the final straw for Saudi: Pundits are thinking the attacks could push Saudi and GCC states closer to joining military operations against Iran. Still, Tehran is sending signals that oil facilities are not being intentionally targeted across the region, and yesterday’s attacks could be an attempt to raise uncertainty about the war’s costs rather than a scorched-earth scenario.

Aramco installations have been attacked before, also by Iran-affiliated forces. Houthis — Yemen’s Iran-backed rebel group — struck the Abqaiq processing facility and the Khurais oil field in 2019, putting in jeopardy some 5% of global oil supply at the time, and targeted an oil depot in Jeddah in 2022. Saudi restored output from Abqaiq and Khurais within days to weeks the first time, but the incident exposed vulnerabilities in Gulf energy infrastructure and briefly rattled global supply confidence, pushing Brent crude to log its steepest single-day surge since the 1990s.

LNG is hit, too

QatarEnergy shut down LNG production after an Iranian drone hit Ras Laffan — the world’s largest export facility, sending European gas prices soaring by more than 50%. The company, which supplies about a fifth of global LNG, has declared force majeure on its LNG contracts.

Why it matters: While Asian buyers dominate Middle Eastern LNG demand, the disruption is expected to intensify global competition for supplies, driving prices higher across markets and, if the price hike continues long enough, resulting in inflationary waves hitting Europe and as far as the US.

It’s a big issue… “Stopping production means you implicitly believe that you will have a tank-top problem, so you will have an issue of not being able to off-take all the production because you have obviously a limited amount of storage,” Heintz tells us. “It also means that you are ready to undergo a very long and potentially costly restart process. [...] Those plants are not designed for being shut down. It’s quite a big move.”

… and definitely out of character: QatarEnergy is “very careful about the reputation and the reliability of their supplies. They don’t want to be in that gray zone where [buyers] don’t know exactly when [supplies] will be loaded and when they will be delivered,” Heintz notes.

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