The closure of Hormuz has paralyzed regional energy logistics — threatening a total production shutdown 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.
Middle East oil producers have roughly 25 days before they run out of storage space, analysts at JP Morgan say. If the Strait remains closed beyond this window, producers may have to stop output entirely because there will be nowhere left to put the oil. A production halt is a massive logistical and technical undertaking. Once wells are capped due to lack of storage, restarting them is neither fast nor cheap.
The situation “has already moved from geopolitical noise to actual impact,” Rabobank Energy Strategist Florence Schmit told EnterpriseAM, as energy infrastructure across the region has been targeted and Israel has already curtailed gas production as a precaution.
“It’s a matter of the duration of this crisis,” Jean-Christian Heintz, Wideangle LNG consulting director, told EnterpriseAM. “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.”
The logistical chokepoint
Aramco halted operations at some of Ras Tanura refinery’s units following a drone strike in the area — shutting the plant as a precaution, sources told Bloomberg, in what appears to be the first direct strike on oil infrastructure in this round of hostilities. The 550k bbl / d facility — one of the kingdom’s largest — sits on the Persian Gulf, directly exposed as maritime traffic through Hormuz grinds to a near-halt.
QatarEnergy shut down LNG production after an Iranian drone hit Ras Laffan, the world’s largest export facility, sending European gas prices soaring more than 50%. The company, which supplies about a fifth of global LNG, has declared force majeure on its LNG contracts. While Asian buyers dominate Middle Eastern LNG demand, the disruption is expected to intensify global competition for supplies, driving prices higher across markets.
Why it matters: “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 obviously have a limited amount of storage,” Heintz adds. “It also means that you are ready to undergo a potentially very long and costly restart process, as generally those plants are not designed for being shut down. It’s quite a big move.”
It's 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.
The oil fallout
With 15 mn bbl / d currently blocked from the market, analysts at Wood Mackenzie and Barclays warn that Brent could surpass USD 100 / bbl as a geopolitical risk premium is baked into every barrel that can still reach a pipe or a port.
Iran ramped up exports in anticipation of US-strikes to multi-year highs last month. Any near-term production loss will not be felt immediately due to this buffer, as the majority of these barrels have cleared physical storage.
But it's got an achilles heel: While Iran has the world's fourth-largest reserves, 90% of its crude flows from a single export terminal: Kharg Island. Though the terminal has recently drained its inventories and stepped up exports, any strike there could freeze some 3 mn bpd of exports.
The disruption will hit Asian markets hardest, as they uptake 45.7% of their total crude load and 29.5% of their gasoline via the strait. Countries like Japan, China, and India — which rely on the Middle East for the vast majority of their crude — are facing immediate supply gaps as tankers are unable to exit the Gulf.
Europe isn’t out of the woods –– up to 30%of Europe’s jet fuel supply comes from the Strait of Hormuz. “Industry-wide, the price of oil — and therefore jet fuel — is also of significant concern. The higher prices rise, and the longer they stay there, the wider the impact will be felt,” Ian Petchenik, director of Communications at Flightradar24, told EnterpriseAM.
Russia could reap the biggest rewards of this crisis. With the region’s supply facing logistical disruption, both India and China could be compelled to deepen reliance on Russia’s supply, Kpler analysts speculate. India, faced with the most acute near-term exposure to the closure, is expected to pivot towards Russian crude quickly due to its proximity and established logistics channels. China has been curbing its uptake of Russia crude as of late, but will likely up its intake if the conflict persists beyond a few weeks.
China has a buffer to deal with the supply crunch in the short-term, retaining a significant crude reserve accumulated during the period of global oversupply. This supply positions China well as a potential re-exporter to third markets if the crisis deepens.
The LNG & LPG fallout
The global LNG supply relies on the corridor, with Qatar accounting for roughly 20% of the world's supply. LNG shipments are currently paralyzed, with at least 11 Qatari LNG tankers pausing mid-voyage, according to ship-tracking data.
India will feel the biggest blow, with up to 85% of its LPG supply having to traverse the strait. “It's not a trivial number or a trivial product to be substituted with anything,” Kpler Director of Oil and Tanker Research Andon Pavlov explains (watch, runtime: 6:10). There are “very limited” alternative supply options for LPG leaving the corridor, he says, deeming the duration risk for the commodity impact as high.
Bangladesh, Thailand, and Japan could look towards Australia, which has been upping its LNG production capacity. Australia still remains the largest exporter of LNG to Asia, with a 30% share, despite Qatar’s market stake increasing last year, making it the region’s second largest supplier.
What’s the differentiating factor? “For India and Pakistan, being deprived of Qatari LNG has more impact for them because they would need to venture far away from the supply basin,” Heintz explained. “Whereas for Southeast Asia, on top of the existing volumes that Qatar is supplying, the natural sellers are Indonesia, Malaysia, and Australia because of the proximity.”
At the end of the day, it’s not only proximity, but it’s also going to be about cost. US supplies could be tapped as an alternative option to an LNG supply crunch, but its capacity limitations may not allow it to handle filling the volume-gap. “Some US LNG, although it’s very far, will be delivered. The spot LNG volumes will be delivered to those remote places. The consequences of that, of course, is that it will sponge up some volume in the Atlantic Basin, because if some US volumes are diverted to markets that do not receive Qatari LNG East of Suez, that means that there’s going to be less US LNG in the Atlantic Basin,” Heintz clarified.
Uninsured waters
Ins. cover pulled amid uncertainty in the Strait: As we await clarity on what will happen to the Strait of Hormuz, ins. providers are already pulling cover from the Gulf. Gard, Skuld, NorthStandard, the London P&I Club, and the American Club all issued cancellation notices, effective 5 March, that switch off war risk cover for ships trading in Iranian, Gulf, and adjacent waters.
The market is shifting toward negotiated pricing, with Skuld flagging a buyback option for owners who still want to trade in the zone, and brokers flagging negotiated coverage at higher rates. Prices could jump by as much as 50%.
What’s next?
Transit risks through Hormuz are already a reality. “Some energy tankers still continue through the waterway, but transits will likely slow over the coming days, impacting actual supplies for crude oil and LNG,” Schmit explained.
Shipping rates and ins. costs will only make this more difficult, as those are impacted as well. “The full damage to supply curtailments will take a few days to become visible and depends largely on how risky actual transit through the strait remains,” she said.
Insurers have warned they will cancel war-risk coverage and raise premiums sharply. “The ins. costs are so high that no vessel can afford or wants to risk going through the Strait at this time,” Kpler Opec+ and Middle East head analyst Said Bakr said. We can start to “think about [Hormuz] like the Red Sea situation, or even worse than that,” Pavlov added.
We’re keeping an eye on GCC infrastructure resilience. If critical export infrastructure –– particularly Jebel Ali or Ras Tanura –– is impacted by Iran’s strikes, a severe and instant supply chain impact would be felt.
Background
At least 150 crude oil and LNG tankers are currently idle off the coasts of the UAE, Oman, and Kuwait. Major shipping giants Maersk, Hapag-Lloyd, MSC, Nippon Yusen, Mitsui O.S.K. Lines, and Kawasaki Kisen Kaisha have suspended all transits through the waterway.
A couple of vessels traversed the strait –– mainly Iranian and Chinese ships –– indicating that the lane isn’t completely shut off, according to data shared by Pavlov. That said, “indiscriminate shooting from Iranian coast guard ships, with some reports of having hit Iranian vessels themselves,” are dissuading anyone from entering the passage. Ships have already been targeted for “ illegally ” passing through the strait.
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