What to know about the Strait of Hormuz amid the widening Iran war

Rob Thummel, senior portfolio manager and managing director at Tortoise Capital, joins BNN Bloomberg to discuss the outlook for oil.

DUBAI, United Arab Emirates — The widening war in Iran has ground tanker traffic through the Strait of Hormuz to a halt and oil prices have soared, highlighting the important role the narrow passageway plays in global energy supply.

The Strait of Hormuz is the narrow mouth of the Persian Gulf through which about a fifth of the world’s oil passes. Tankers travelling through the strait, which is bordered in the north by Iran, carry oil and gas from Saudi Arabia, Kuwait, Iraq, Qatar, Bahrain, the UAE and Iran. Most of that oil goes to Asia.

Any disruption to traffic through the Strait of Hormuz is highly disruptive to the oil trade.

“The scale of what is at stake cannot be overstated,” said Hakan Kaya, senior portfolio manager at investment management firm Neuberger Berman. He said a partial slowdown lasting a week or two could be absorbed by oil companies. But a full or near full closure lasting a month or more would push crude oil prices, trading above US$75 on Tuesday, “well into triple digits” and European natural gas prices “toward or above the crisis levels seen in 2022.”

Here’s what to know about the strait and the widening Iran war.

A key waterway for global shipping

The Strait of Hormuz is a bending waterway, about 33 kilometres wide at its narrowest point. It connects the Persian Gulf to the Gulf of Oman. From there, ships can then travel to the rest of the world. While Iran and Oman have their territorial waters in the strait, it’s viewed as an international waterway all ships can ply. The United Arab Emirates, home to the skyscraper-studded city of Dubai, also sits near the waterway.

The strait long has been important for trade

The Strait of Hormuz through history has been important for trade, with ceramics, ivory, silk and textiles moving from China through the region. In the modern era, it is the route for supertankers carrying oil and gas from Saudi Arabia, Kuwait, Iraq, Qatar, Bahrain, the UAE and Iran. The vast majority of it goes to markets in Asia, including Iran’s only remaining oil customer, China.

While there are pipelines in Saudi Arabia and the UAE that can avoid the passage, the U.S. Energy Information Administration says “most volumes that transit the strait have no alternative means of exiting the region.”

Threats to the route have spiked global energy prices in the past, including during the Israel-Iran war in June.

Is the strait closed?

Iran has attacked several ships in the Strait of Hormuz and threatened any ships that try to pass through, effectively closing it. But a move by Trump on Tuesday to protect tankers in the strait could get things moving again.

“The Strait of Hormuz is closed,” declared Iranian Brig. Gen. Ebrahim Jabbari, an adviser to the paramilitary Revolutionary Guard, vowing that any ships that passed through it would be set on fire.

Previously, Iran temporarily shut down parts of the strait in mid-February for what it said was a military drill. Oil prices jumped about six per cent in the following days.

In past times of tension and conflict, Iran has at times harassed shipping though the narrows, and during the 1980s’ Iran-Iraq war, both sides attacked tankers and other vessels, using naval mines to completely shut down traffic at points. But Iran had not carried out repeated threats to close the waterway altogether since the 1980s, even during last year’s 12-day war when Israel and the U.S. bombarded Iran’s key nuclear and military sites.

Global shippers suspend operations

Global shippers have issued service alerts saying they have suspended operations in the area. Danish shipping company Maersk, the world’s biggest shipping company, said Sunday it is suspending all vessel crossings in the Strait of Hormuz until further notice. Other ocean carriers including Hapag-Lloyd, CMA-CGM and MSC made similar announcements.

“No one is wanting to navigate it, and there’s no insurer who’s willing to stand behind any transport going through there right now,” said Tom Goldsby, logistics chairman in the Supply Chain Management Department at the University of Tennessee. “Those ships that got stuck in the Gulf are not going anywhere. ... There’s also a whole host of ships that were heading into the Gulf to replace them, and of course they’re anchored or going elsewhere now.”

About 3,200 ships, about four per cent of global ship tonnage, are idle inside the Persian Gulf, according to estimates by Clarksons Research, which tracks shipping data. Yet that includes about 1,231 ships that likely only operate within the Gulf. About 500 ships, or one per cent of global tonnage, are currently “waiting” outside the Gulf in ports off the coast of the UAE and Oman, according to the firm.

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By Jon Gambrell And Mae Anderson

Anderson reported from New York.