Countries Urge Caution in Strait of Hormuz

Oil started today’s trading higher, but like the rest of the week it’s been a roller coaster ride since then. After trading roughly 1% higher in early trading, prices are now flat. Crude is trading currently at $56.15, now just slightly above Thursday’s close.

Fuel prices are trade a bit lower than crude. Diesel is currently trading at $1.9115, down 0.3 cents from Thursday’s close. Gasoline prices are $1.8686, down 1.2 cents.

Yesterday Saudi Arabia joined the growing swell of voices urging caution when commuting through the Strait of Hormuz. Iran has been taking a more active stance in the critical passageway, seizing a British oil tanker and allegedly firing missiles at several vessels near the area over the past few months. The UK is working with the EU to ensure European vessels have naval coverage while commuting through the region. The US has taken a Maximum Pressure campaign against Iran, increasing its military presence in the area while stopping short of securitizing the Strait.

Why is the Strait of Hormuz so important? We’ve noted before that 20% of the world’s daily oil needs flows through the region. What happens if that supply was cut off?

The OECD (Western World) has roughly 2.9 billion barrels of oil and petroleum products – enough to provide for global oil needs for 29 days. If the Strait of Hormuz was shut down, within 5 days, 3% of the world’s oil reserve would be drawn. In just two months, HALF of the oil reserves would be depleted. Global oil demands are built on just-in-time infrastructure that could not easily handle such a disruption.

Of course, the impact would be asymmetric – India and China would see much faster depletions than the US, since we are hardly reliant on Middle Eastern oil. Still, prices would skyrocket within days if the Strait fully shut down, creating a massive blow to consumers and devastating the global economy. While a complete shutdown of the Strait is highly improbable, the potential consequences would be catastrophic for consumers, which is why oil prices are reflecting a risk premium.