Strait of Hormuz risk escalated even before missiles struck, as military signals in West Asia forced oil markets to reassess geographic vulnerability. The oil market felt the danger of missiles headed for targets before the missiles struck, with military signals in West Asia creating a tension that grew quietly. When the U.S.-Israel launch marked a major escalation in hostilities in West Asia, traders immediately reassessed the risk to their energy routes. When assessing energy prices, there was a shift from production to geography. The Strait of Hormuz became the entire region’s centre of vulnerability. Because of this, the region’s narrow corridor has become a significant economic focal point for oil supply, and thus any disruption to the Strait of Hormuz threatens the viability of global oil supplies.
Therefore, all markets were prepared for volatility before trading resumed. Announcements from Iran have also been increasing those fears tremendously. Announcement of closure of the Strait of Hormuz changed the conflict from an economic conflict to an economic flashpoint, creating new levels of uncertainty regarding global energy security.
Why the Strait of Hormuz risk holds unmatched strategic importance
The Strait of Hormuz provides a route through which the Persian Gulf connects to the rest of the world’s oceans. Because of this, many energy-producing countries are able to export their products through it as well. Approximately 1/5 of all crude oil produced in the world flows through this waterway, and liquefied natural gas is transported daily in very large volumes on vessels utilizing the Strait of Hormuz. As a result of the narrowness of the waterway, any disruption has the potential for significant delays in shipments and changes in the direction of vessels. Due to these two impacts on shipping, costs associated with freight, insurance, and shipping significantly increase as well. There are alternative routes to transport these commodities, but they require substantially longer transit times for transit.
As a result, Indian exporters will be immediately affected and experience increased costs due to the closure of this waterway and loss of access to the Suez Canal. Consequently, Indian exporters will incur costs associated with longer transit distances for all of their shipments to Europe and the United States. The International Energy Association has previously stated that this route is critical to the Gulf producers, and S.C. Ralhan stated that the continued diversification of Indian exports could delay their shipment until after the weather conditions have improved. In addition, Ralhan mentioned that higher marine insurance premiums will further increase export transaction costs.
How uncertainty shapes prices and India’s exposure
This corridor is vital for India’s economy, as it is how we import half of our crude and most of our LNG. Prashant Vasisht clearly stated the economic ramifications, as he stated that “for Refiners in India, while crude oil may be sourced from other countries by ship—US, Africa and South America
high prices for all energy sources are likely to mean an increase in the cost of imports,” and he also commented on margin pressure by saying that “high prices for crude oil would reduce the marketing margins and profitability of oil marketing companies.” Currently, shipping volumes have dropped off dramatically, with S&P Global stating a large decline in the number of vessels. Fatih Birol is closely monitoring oil supply and demand in relation to Iran and the potential impact this will have on oil and gas markets and trade flows, and he is not overly concerned because there is currently enough supply in the market.
However, analysts are cautious, with JM Financial providing scenario analysis on the ramifications of any military operations involving Iran. JM Financial’s research indicated that if there is limited retaliation against Iran, the prices would increase by $5 to $10 per barrel; direct damage to oil facilities in Iran would add $10 to $12 per barrel; the closure of the Strait of Hormuz would push crude prices to over $90 per barrel; and if a broader regional conflict occurs, crude will be over $100 per barrel. While energy is always a great indicator of the overall economy, there are other macroeconomic risks that will be exacerbated by even higher energy prices. The Strait of Hormuz risk remains the single most destabilising factor for oil prices, freight costs, and energy security.
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