Strait of Hormuz: Oil choke point in focus as Trump says U.S. downed Iranian drone

A narrow waterway in the Middle East that marks the most sensitive transportation choke point for global oil supplies remained in focus Thursday after President Donald Trump said a U.S. warship downed an Iranian drone that had threatened it.

The action was the latest in a series of incidents in the region that have seen tensions rise between the U.S. and Iran following the Trump administration’s decision to withdraw from a 2015 nuclear deal and reimposed sanctions on Tehran.

The risk of a U.S.-Iran military conflict has been seen on the rise since spring. The drone incident came after Iran’s Islamic Revolutionary Guard Corps said it had seized a tanker it accused of smuggling Iranian fuel. Last month, Iran shot down a U.S.-operated drone near the strait. Trump weighed retaliation but said he called off a strike at the last minute due to worries the fatalities wouldn’t be proportional to the loss of an unmanned aircraft.

Oil prices fell this week as U.S. and Iranian officials signaled scope for new negotiations, though the seizure of the tanker and the drone incident subsequently served to undercut those expectations. U.S. CLQ19, +0.78% and global crude benchmarks BRNU19, +1.05% fell sharply Wednesday and Thursday, but moved higher in electronic trade after Trump’s remarks about the drone.

Here’s a look at the Strait of Hormuz and why it’s a key concern for oil traders:

Where is the Strait of Hormuz?
The Strait of Hormuz is a narrow waterway that 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 21 million barrels of oil a day flowed through it in 2018, equivalent to roughly a third of global seaborne oil trade and about 21% of global petroleum liquids consumption, the U.S. Energy Information Administration said last month.

Can the strait be bypassed?
Not easily. Saudi Arabia and the United Arab Emirates operate the only pipelines capable of shipping crude outside the Persian Gulf and the additional pipeline capacity to circumvent the strait, the EIA said. At the end of 2018, the total available crude-oil pipeline capacity for both countries combined was estimated at 6.5 million barrels a day. With 2.7 million barrels a day moving through the pipelines that year, around 3.8 million barrels a day of unused capacity would have been available to bypass the strait, the EIA said (see table below).

Could Iran close the strait?
The presence of the U.S. Navy’s Bahrain-based Fifth Fleet has long cast doubt on Iran’s ability to close the waterway, analysts said. In addition, 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 U.S. military 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,” said Helima Croft, global head of commodity strategy at RBC Capital Markets said, in a May research note.
Source: MarketWatch