Economy

'Strait of Hormuz closure would be catastrophic'

One-third of seaborne oil and 20 percent of global oil production moves through the Strait of Hormuz, energy expert says

Ebru Sengul   | 29.04.2019
'Strait of Hormuz closure would be catastrophic'

ANKARA

Closing the Strait of Hormuz would be catastrophic for oil markets and tantamount to a doomsday scenario for global oil markets, but is very unlikely, Samantha Gross, a fellow at the Brookings Institution's Foreign Policy program's Energy Security and Climate Initiative, has told Anadolu Agency (AA) on Friday.

The Strait of Hormuz, a strait between the Persian Gulf and the Gulf of Oman, is a major channel for international oil shipments. The lion’s share of petroleum from the region’s top producers -- including Saudi Arabia, Iraq and Kuwait -- passes through the Strait of Hormuz en route to oil-thirsty markets in the Far East.

Recent days have seen mounting tension between Washington and Tehran, with the latter threatening to close the strategic Strait of Hormuz in response to U.S. sanctions on Iran’s energy sector.

Last Monday, the Trump administration announced that it will no longer renew Iran sanctions' waivers on eight countries -- Turkey, China, Greece, India, Italy, Japan, South Korea and Taiwan -- upon their expiration on May 2. The move is part of Trump's 'maximum pressure' on Iran with a view to bringing the country’s petroleum revenue to zero.

"President [Donald] Trump believes that by pushing us, by imposing economic pressure on us, we will sell our dignity. Not gonna happen," Iranian foreign minister Mohammad Javad Zarif said last week.

He said it is within Iran's "vital national interest" to keep both the Persian Gulf and the Strait of Hormuz open.

According to Gross, if Iran tries to close the Strait of Hormuz, the U.S. military response will be "strong and swift", which Iran knows.

She highlighted that one-third of seaborne oil and 20 percent of global oil production moves through the Strait of Hormuz.

"I do not think they will try. Closing the strait would be catastrophic for oil markets. It’s a doomsday scenario for world oil markets, but very unlikely," she continued.


Longer-term upward pressure on oil prices

Gross said that oil prices surged right after the White House announcement of its intention to not extend exemptions to Iran’s oil sanctions, but since then prices have moderated a little.

"Oil markets today seem to be torn between opposing sentiments - concern about tight supply with the situations in Venezuela and Libya plus the end of waivers for purchases from Iran, and concern about the possibility of slowing economic growth and resulting slowing oil demand. The Iran sanctions announcement certainly increases concern about the first factor," she asserted.

However, over the longer term, even if the market is able to replace oil lost from Iran, it will be operating at a lower level of spare capacity and will be less able to respond to any new disruption, according to Gross, which will put "longer-term upward pressure on oil prices."

Gross contended that reducing Iran's exports all the way to zero, which the Trump administration is threatening, will be very difficult.

"But I also do not think Iran will be able to export 'as much crude as it needs and wishes.' Some will be willing and able to work around the U.S. sanctions, particularly in China where some banks are already under U.S. sanctions. But Iran will not be able to export as much oil as it is now – the penalty for those importing is likely to be too great," Gross said.

Following the U.S. announcement last week, Iran’s Supreme Leader Ayatollah Ali Khamenei said on Wednesday that "the U.S. administration’s hostile attempts to block Iran’s oil sales will lead nowhere, and that the country will export as much crude as it needs and wishes," according to Iran's local media outlets.


OPEC's response

Gross said that the Organization of Petroleum Exporting Countries (OPEC) will almost certainly increase production and members will be able to sell a bit more oil without depressing prices since Iranian oil "will be mostly off the market."

In a statement last week, the White House said both Saudi Arabia and the United Arab Emirates (U.A.E.) have committed to increasing their oil supply to ensure that global supply is maintained.

"However, they [OPEC] may enjoy the higher prices and not replace it all – it’s difficult to say. The Saudis and Emiratis might not mind a bit of profit taking at Iran’s expense," Gross explained.


Oil prices to balance at $70 per barrel

Jean-Francois Seznec, an expert from the Middle East Institute, told AA that the end to Iranian sanctions waivers will not greatly affect oil prices in the short and long term.

"Saudi Arabia, the U.A.E. and Russia will be happy to produce more for more money. Plus, the U.S. shale producers will continue to increase their production. Hence demand and supply will be more or less in balance, albeit at $70 per barrel," he said.

Seznec also predicted that Iranian oil exports will be about 700,000 barrels per day and said it is not possible for Iran to export “as much crude as it needs and wishes.”

"I think this time the U.S. will aggressively enforce the secondary sanctions. This is known to most large and medium-size importers, who will prefer to skip Iran in favor of reliable supplies from Saudi Arabia or Russia," Seznec explained.

He said that Saudi Arabia, the U.A.E. in OPEC, Russia and U.S. shale producers will be happy to produce more at a relatively stable but high price of between $70 and $75.

"Indeed they will increase production, not as much as the U.S. government would wish, as the producers do like it at $70 per barrel," Seznec added.

Seznec clarified that the threat to the Strait of Hormuz closure has been misinterpreted. He underlined that Iranian foreign minister Zarif did not say Iran would close the Strait of Hormuz if it could not sell its oil.

"He said that they would close the straits if the U.S. closes the straits to Iran, which the U.S., of course, will not do. Hence the threat of closure by Iran is in my view a misreading of Iran statements by the press," he asserted.

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