 |
|
The Strait of Hormuz, a narrow but strategically vital waterway through which a significant portion of the world's oil and gas transits, remains a focal point of geopolitical tension, particularly concerning Iran's potential actions. While Iran has repeatedly threatened to close the Strait, analysts suggest these threats are primarily used as a diplomatic lever rather than an indication of imminent action. The article emphasizes that despite these tensions, oil markets remain well-supplied, posing no immediate threat to the global energy order. The waterway's importance stems from its role as the main route for oil exports from several major producers, including Saudi Arabia, Iran, Iraq, Kuwait, and the UAE, as well as significant LNG shipments, especially from Qatar. Hitesh Jain, Strategist at Yes Securities, highlights that Iran has never actually closed the Strait due to the substantial strategic and economic costs involved, underscoring its essential role in global energy flows and Iran's own economy. Instead, Tehran leverages the threat of closure as a bargaining tool. The article also acknowledges the potential for escalation in the region to significantly impact global supplies and prices, noting that any major disruption could have far-reaching consequences. The current state of the oil market, however, provides a buffer against these potential disruptions. The analyst emphasizes the presence of substantial spare capacity within OPEC, estimated at 4 million barrels per day, alongside a pre-existing global surplus of 0.9 million barrels per day. Further bolstering market resilience is the rise of US shale production, which has significantly increased global supply and flexibility. On the demand side, the article points to factors that are tempering growth projections. China's economic recovery has been weaker than anticipated, and the structural shift toward electric vehicles is also contributing to a slower rate of demand increase. Given this backdrop, analysts believe that Brent crude is unlikely to sustain levels above USD 80 per barrel unless there is a complete closure of the Strait of Hormuz or a targeted attack on critical Gulf infrastructure. This price outlook is further supported by projections from Icra, which estimates crude prices to average between USD 70-80 per barrel for the current fiscal year. It is crucial to acknowledge that a sustained flare-up in the conflict could pose upside risks to these estimates, potentially leading to higher crude oil prices and a larger current account deficit for countries heavily reliant on oil imports. The reliance of India on oil imports is highlighted in the article. India imports more than 85 per cent of its oil needs and about half of its gas requirement. A USD 10 per barrel increase in the average price of crude oil would typically push up net oil imports by USD 13-14 billion during the year, enlarging the CAD by 0.3 per cent of GDP. This highlights the vulnerability of the Indian economy to fluctuations in global oil prices and the importance of maintaining a stable energy supply chain.
The analysis reinforces the assertion that Iran's threats regarding the Strait of Hormuz are primarily a diplomatic strategy, citing historical precedent and the inherent economic risks associated with a closure. The article notes that Iran has threatened to close the Strait numerous times in the past but has never followed through, as doing so would be strategically and economically self-defeating. The Strait is vital as about 20 per cent of global oil and key LNG exports, especially from Qatar, transit through it. A real closure would provoke retaliation from US Naval Forces in the Persian Gulf, harm Iran's own oil exports and imports, and undermine its diplomatic standing. Consequently, Tehran continues to use the threat as a bargaining tool without disrupting actual supplies. The existence of additional buffers, such as US strategic reserves and flexible shale output, further supports market stability. This redundancy helps to cushion the impact of geopolitical events and reduces the likelihood of a sustained supply shock. Since 2008, US shale has boosted global supply and flexibility, helping markets absorb geopolitical shocks with only brief price spikes. OPEC's reduced market share and higher spare capacity, mainly from Saudi Arabia and the UAE, have further limited volatility. This dynamic has kept oil prices more range-bound, with US shale acting as a soft ceiling on prices. The article also considers the demand side of the oil market, emphasizing the ongoing shift in global consumption patterns. China's post-COVID recovery remains weak due to economic restructuring and a sluggish property sector. Meanwhile, long-term trends like EV adoption, better fuel efficiency, and green policies are slowing demand growth in OECD nations. Reflecting a more tempered consumption outlook, the IEA and EIA have both cut their 2025 global oil demand forecasts by 0.2-0.28 million barrels per day.
Furthermore, the article provides insight into Iran's oil production and exports, indicating that while Iranian oil and gas facilities have reportedly been attacked, the extent of damage is not clear. Icra said Iran's crude oil production is around 3.3 million bpd, of which it exports 1.8-2.0 million bpd. However, any disruption of Iranian production and supplies or a wider regional conflict impacting other large producers in the region could push energy prices higher. The impact of these events could affect countries, like India, that are heavily reliant on oil imports from the region. Crude oil imports from Iraq, Saudi Arabia, Kuwait and the UAE that pass through the Strait of Hormuz account for around 40-45 per cent of total crude imports by India. About 60 per cent of the natural gas imports by India pass through the Strait. The article also touches on the impact of elevated crude oil prices on various sectors. At these elevated crude oil prices, while the profitability of upstream players will remain healthy and their capex plans will remain intact, the marketing margins of downstream players will be impacted along with the expansion of LPG under-recoveries. The analysis provides a comprehensive assessment of the complex interplay between geopolitical tensions, oil market dynamics, and economic implications, offering a nuanced perspective on the situation in the Strait of Hormuz and its impact on the global energy landscape. While the threats posed by Iran are a significant concern, the article suggests that the current market conditions and the presence of various mitigating factors provide a degree of resilience against potential disruptions. Continued monitoring of the situation is crucial to ensure stability and avoid any significant economic consequences. Overall the analysis provides the view that while any conflict would impact prices, a closure isn't expected and oil markets are currently stable due to a variety of factors including US shale production.