Strait of Hormuz: Attack on oil tankers puts crucial transport ‘choke point’ in focus

The Strait of Hormuz, the world’s most sensitive oil-transportation choke point, was in focus Thursday, after two tankers were reportedly attacked, and damaged, off the coast of Iran.

U.S. Secretary of State Mike Pompeo blamed Iran for the attacks, while Tehran denied responsibility. The incident escalates tensions between the U.S. and Iran and is seen raising the threat of a military confrontation between the two countries and heightening fears of supply disruptions. The attacks follow a May incident that saw four tankers damaged in what Gulf authorities deemed “sabotage.”

The incidents follow the U.S. decision to reimpose sanctions on Iran over its nuclear program, with Washington moving this spring to end waivers for several importers of Iranian crude.

While the May events had triggered some volatility, the market “had mainly moved on from the Middle East after President Trump publicly insisted that he did not want war with Iran and reignited trade war concerns with his tariff tweets,” said Helima Croft, global head of commodity strategy at RBC Capital Markets. “However, we believe that escalation will likely be the order of the day as long as the United States continues it’s ‘maximum pressure’ policy and insists that Iran completely abandon its revolutionary agenda in order to receive economic relief.”

The two ships hit in Thursday’s attacks — one a Norwegian-owned tanker carrying naphtha and the other a Japanese-owned tanker — had recently traveled through the strait, which connects the Gulf of Oman to the Persian Gulf.

Oil futures US:CLM9 BRNQ19, -0.02% ended more than 2% higher, but had surged by more than 4% at session highs. U.S. Treasurys, typically a haven during periods of global uncertainty, rallied, pulling down yields, but the attacks didn’t appear to be spooking investors into running for cover. Global equities were mostly higher, with the S&P 500 SPX, +0.41% up 0.3% and the Dow Jones Industrial Average DJIA, +0.39% hanging on to a gain or around 63 points, or 0.3%.

Here’s a look at the Strait of Hormuz and why it’s so important to the global crude-oil market.

Where is the Strait of Hormuz?
The Strait of Hormuz is a narrow waterway that, as noted, links the Persian Gulf with the Gulf of Oman and the Arabian Sea.

At its narrowest point, the waterway is only 21 miles wide, and the width of the shipping lane in either direction is just 2 miles, separated by a two-mile buffer zone.

Why is it important?
Oil tankers carrying crude from ports on the Persian Gulf must pass through the strait. Around 18.5 million barrels a day of crude and refined products moved through it in 2016, nearly a third of all seaborne-traded oil and almost 20% of all crude produced globally, according to the U.S. Energy Information Administration. That makes the Strait of Hormuz the world’s most sensitive oil transportation choke point.

What’s the threat?
Iranian officials in April threatened to interrupt the flow of oil through the strait after the Trump administration said it would end waivers that allow countries to import Iranian oil.

Iran’s Zarif, in early May, said the country had no interest in escalating tensions with the U.S., according to Iranian news agency Tasnim. He said Tehran viewed the Persian Gulf and the Strait of Hormuz as “our lifeline” and wanted them “safe, secure and free for navigation of all countries, including Iran.”

A pair of Saudi oil tankers and a Norwegian-flagged vessel were damaged last month in what Gulf officials called a “sabotage” attack off the coast of the United Arab Emirates.

The U.S. in May announced it was sending an aircraft carrier group, bombers and a Patriot antimissile battery to counter what the Trump administration said were “clear indications” that Iran and its proxies were preparing to possibly attack U.S. forces in the region, the AP reported. That is in addition to the presence of the U.S. Fifth Fleet, which is based in Bahrain.

Could Iran close the strait?
The Fifth Fleet’s presence has long cast doubt on Iran’s ability to close the waterway, analysts said.

The U.S. naval presence would make it extremely difficult for Iran to choke off traffic, but the country “has the strategic depth to stage one-off attacks on vessels, not just in the critical chokepoints but also in the region’s relatively open waters,” Croft said, in a May research note.

What does Iran say?
Iranian Foreign Minister Javad Zarif, noting the attack occurred during a visit to Tehran by Japanese Prime Minister Shinzo Abe aimed at easing U.S.-Iran tensions, suggested the incident was a false-flag operation. “Suspicious doesn’t begin to describe what likely transpired this morning,” he wrote on Twitter:

Is a U.S.-Iran military confrontation more likely?
It’s too early to definitively attribute responsibility for the attacks to Iran, but they do “fit squarely within Iranian capabilities and motivations,” wrote analysts at Eurasia Group, in a note. They said Iran’s Islamic Revolutionary Guard Corps and security services have often conducted attacks and other operations aimed at undermining diplomatic efforts by the country’s elected representatives.

Eurasia Group said the events raise the possibility of military action between the U.S. and Iran over the next six months. They see a 30% probability of a confrontation over that period.

The attacks seem designed to avoid crossing a threshold that would demand a U.S. military response by remaining difficult to attribute and not targeting U.S. individuals or assets, they said, but argued that the cumulative effect of the attacks will be viewed as a test of U.S. security commitments to its Gulf allies.
Source: MarketWatch