Escalating tension between the U.S. and Iran has been increasingly threatening secure energy supply from the Strait of Hormuz to the global markets.
Tensions between the two countries climbed to another level on Thursday after an American reconnaissance drone was shutdown on the region and U.S. President Donald Trump said 'Iran made a very big mistake!' on Twitter.
Crude oil prices posted their biggest percentage gain on Thursday with international benchmark Brent crude jumping 4.6% and American benchmark West Texas Intermediate soaring 6.8%.
Strait of Hormuz is the world's largest oil transit chokepoint, and it is key for many energy exporting countries in the Middle East, as well as major economies in Asia that import oil and gas from the region.
Saudi Arabia, the world's biggest crude oil exporter, and Qatar, the leading liquified natural gas (LNG) exporter for 13 consecutive years, are two of the most significant energy suppliers for global markets, while Kuwait and the United Arab Emirates also depend on the Strait for oil transit.
Strait of Hormuz, which connects the Persian Gulf with the Gulf of Oman and located between Oman and Iran saw a daily average oil flow of 21 million barrels per day (bpd) in 2018, according to the U.S.' Energy Information Administration (EIA).
That amount was also equivalent of approximately 21% of petroleum liquids consumption in the world last year, according to the adminitstration.
'The inability of oil to transit a major chokepoint, even temporarily, can lead to substantial supply delays and higher shipping costs, resulting in higher world energy prices,' the EIA said in a statement on Thursday.
- Asian economies 'top destinations'
Around 76% of crude oil and condensate that moved through the Strait of Hormuz went to Asian markets last year, according to the EIA.
Major Asian economies like China, India, Japan, South Korea, and Singapore were the top destinations for crude oil moving to Asia from the Strait of Hormuz. Those countries accounted for 65% of all crude oil and condensate transit that passed through the Strait of Hormuz in 2018, it said.
Despite the recent tensions, the U.S. is also a major crude importer from the Strait.
The world's largest oil consumer imported about 1.4 million bpd of crude oil and condensate from Persian Gulf countries through the Strait of Hormuz last year, the EIA said.
This accounts for around 18% of total U.S. crude oil and condensate imports, and 7% of total U.S. petroleum liquids consumption, it added.
- Tension risks Trump's low oil price objective
As the escalating tension between the U.S. and Iran threatens the secure supply of oil and LNG from the region to world energy markets, it pushes both gas and oil prices higher because of perceived threats.
When Iran threatened to close the Strait of Hormuz on April 22, Brent crude price jumped 2.88% and WTI soared 2.66%.
Rising crude oil prices, however, goes against the policies of Trump who insists on lower oil prices and demands gasoline prices to be low in the U.S., especially before the presidential elections in 2020 where he will rerun for a second term in the White House.
Attacks on oil tankers and pumping stations have also recently pushed crude prices up, underlining the importance of the Strait of Hormuz.
When two oil tankers were attacked on June 13 in the Gulf of Oman, the event pushed both Brent and WTI prices up 2.23% each.
Saudi Arabia's two oil tankers off the coast of the United Arab Emirates were attacked on May 12, pushing oil prices, and this was followed by a drone attack on two oil-pumping stations in Saudi Arabia on May 14, which increased oil prices more than 1%.
- Options to bypass Hormuz
Although some oil transit chokepoints have alternative routes that could be used in the event of a crisis, the Strait of Hormuz only offer limited routes for energy suppliers in the region to export their oil and gas.
'Only Saudi Arabia and the United Arab Emirates have pipelines that can ship crude oil outside the Persian Gulf and have the additional pipeline capacity to circumvent the Strait of Hormuz,' the EIA said in the statement.
'At the end of 2018, the total available crude oil pipeline capacity from the two countries combined was estimated at 6.5 million bpd. In that year, 2.7 million bpd of crude oil moved through the pipelines, leaving about 3.8 million bpd of unused capacity that could have bypassed the strait,' it added.
By Ovunc Kutlu