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Analysts Warn Hormuz Closure Would Cause Major Oil and Gas Price Spike

If tensions between Iran and Israel lead to the closure of the Strait of Hormuz this would cause a surge in crude oil and liquefied natural gas prices.

The warning comes from analysts with Indian Motilal Oswal Financial Services. The firm acknowledged that de-escalation efforts would help avoid a price spike but noted the importance of the Strait of Hormuz, which currently handles 21 million barrels daily in crude and other liquid energy cargos. In the event of a closure, finding alternative routes for these volumes would be close to impossible.

The danger of Iran closing the Strait of Hormuz, which is off its coast, has been hanging over the international oil market for years. Iran itself has threatened closure on more than one occasion. However, it has never followed up on the threats, likely because closing Hormuz will also close Iran’s own outlet to the oil market.

The analysts also noted that while traders seem to be paying more attention to the oil market, it is liquefied natural gas that will experience the sharper price spike.

"While investors focus on oil, we believe that spot LNG prices will witness even sharper escalation if the Strait of Hormuz is closed due to the absence of alternative routes," they said, as quoted by the Business Standard.

Oil from the UAE and Saudi Arabia has alternative routes via the Red Sea, the analysts explained, but there are no such routes for LNG available.

The Strait of Hormuz handles about 20% of the crude oil that the world consumes on a daily basis. Last year, the average daily rate stood at around 20.5 million barrels, per Vortexa data cited by Reuters.

As for LNG, the Strait of Hormuz is Qatar’s principal outlet for global markets, handling almost all of its exports. Per Vortexa figures, the annual LNG throughput of the chokepoint last year was around 80 million tons, equal to a fifth of the global total.

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By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on April 22 2024 said:
    In the case of a sharp escalation between Israel and Iran or a joint attacks by the United States and Israel against Iranian nuclear installations, the ultimate weapon in the hand of Iran is to disrupt oil and LNG shipments through the Strait of Hormuz.

    Whole this is a very powerful weapon, it is virtually impossible for Iran to block the Strait of Hormuz which at its narrowest point is 34 miles wide. However, Iran can achieve its objectives by mining the Strait and hoping that one of its mines hits an oil tanker and sinks it. Alternatively, it is enough for Iran to threaten sinking one oil tanker crossing the Strait to stop oil tankers from around the world crossing the Strait even with naval escort.

    Moreover, most of the major global insurance companies would then hesitate to provide insurance cover to tankers in the face of Iranian threats thus preventing them from crossing the Strait.

    A mining of the Strait of Hormuz could deprive the global oil market of more than 20 million barrels a day (mbd) or 20% of daily global oil consumption and sizeable volumes of Qatar's LNG exports thus sending Brent crude oil price to surge above $100 a barrel and may even hit $110-$120 for a short while until the Strait is cleared by mine-clearing operations by the US and other allies' navies.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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