The closure of the Strait of Hormuz has jolted global markets and oil prices are rising with no signs of the US-Israel-Iran war abating. The escalating conflict in Iran has blocked the movement of tankers through the Strait of Hormuz, sending oil prices sharply higher and underscoring the strategic importance of the vital sea corridor to global energy markets.The Strait of Hormuz forms a narrow gateway to the Persian Gulf and handles about 20% of the world’s oil shipments. Ships passing through the channel, which has Iran on its northern bank, transport crude oil and gas from Saudi Arabia, Kuwait, Iraq, Qatar, Bahrain, the United Arab Emirates and Iran. A large share of these exports are destined for Asian economies – and India is considered particularly vulnerable. Therefore, any disruption to navigation in the Strait of Hormuz poses a serious threat to international oil trade flows.
Importance of the Strait of Hormuz to global shipping
The Strait of Hormuz is a winding channel that narrows to about 33 kilometers or 21 miles at its narrowest extension. It serves as the link between the Persian Gulf and the Gulf of Oman, giving ships access to global sea routes.Read this also India’s energy security risks in the Middle East: How much oil, LPG, LNG reserves do we have? Although parts of the strait fall within the territorial waters of Iran and Oman, it is considered an international route open to ships of all countries. The United Arab Emirates, which includes the skyline-dominating city of Dubai, is located close to this strategic corridor.
For centuries, the Strait of Hormuz has played a central role in commerce, with goods such as ceramics, ivory, silk, and textiles coming through the region from China. In contemporary times, it serves as a major transit point for large tankers transporting oil and gas to and from Saudi Arabia, Kuwait, Iraq, Qatar, Bahrain, the United Arab Emirates and Iran. Most of these energy supplies are sent to Asian destinations, including China, which remains Iran’s only significant oil buyer.“The scale of what is at stake cannot be overstated,” Hakan Kaya, senior portfolio manager at investment management firm Neuberger Berman, told the AP. He said limited disruption lasting a week or two could be managed by energy companies. However, a complete or near-complete shutdown lasting a month or more would send crude oil prices rising “into the triple digits” and push European natural gas rates “toward or above crisis levels seen in 2022.”Although Saudi Arabia and the United Arab Emirates operate pipelines that can bypass the strait, the US Energy Information Administration states that “the majority of volumes crossing the strait have no alternative means of exiting the area.”Read this also 1970s style oil shock loading? Crude could reach $100 if Strait of Hormuz closes amid Middle East tensions – what it meansIran has already targeted several ships in the Strait of Hormuz and warned ships against attempting to transit, effectively halting traffic through the waterway.“The Strait of Hormuz is closed,” the Iranian brigadier announced. general Ibrahim Jabbari, an adviser to the paramilitary Revolutionary Guard, warned that any ship attempting to pass through the route would be set on fire.
Major global shipping lines have issued advisories confirming the suspension of operations in the region. Danish shipping giant Maersk, the world’s largest container carrier, announced on Sunday that it would halt the transit of all ships through the Strait of Hormuz until further notice. Other major operators, including Hapag-Lloyd, CMA-CGM and MSC, also issued similar statements.Data from Clarkson Research, a firm that tracks global shipping activity, indicates that about 3,200 ships, accounting for about 4% of worldwide shipping tonnage, are currently idle within the Persian Gulf.
Trump response and insurance
US President Donald Trump said on social media on Tuesday that he has directed the United States Development Finance Agency to offer political risk insurance for ships transporting oil and other cargo through the Persian Gulf, describing the coverage as available “at a very reasonable price.”Political risk insurance is designed to protect companies against financial setbacks resulting from political instability, government intervention or acts of violence.Read this also Oil supplies affected by US-Israel-Iran war: How is India preparing for the economic fallout?He said the US Navy would provide escort for oil tankers transiting the Strait of Hormuz if needed. The Navy currently maintains a presence in the region that includes at least eight destroyers and three littoral combat ships. These ships were first deployed with commercial shipping in both the Persian Gulf and the Red Sea.
Dependence on India and China
On the oil, LPG, LNG and trade front, India is sensitive to the impact of the closure of the Strait of Hormuz. A large portion of the oil flowing through the Strait of Hormuz every day is headed for China and India. However, the vulnerabilities to closing the Strait of Hormuz differ significantly between India and China.
According to global real-time data and analytics provider Kpler, about 2.5 to 2.7 million barrels per day of India’s crude passes through the Strait of Hormuz, mainly coming from Iraq, Saudi Arabia, the United Arab Emirates and Kuwait. Coincidentally, in recent months, refiners have reduced the share of their Russian intake, increasing the share of Middle Eastern barrels in the total import mix. This change has increased India’s short-term sensitivity to any disruption affecting transit through the Strait of Hormuz.Shipping data from Kepler shows that Russian crude remains present in the Indian Ocean and Arabian Sea, including supplies held in floating storage. If flows from the Gulf decline, Indian refiners will be able to redirect purchases toward Russian grades with relative speed. Russia has already said that it is ready to help in meeting India’s energy needs.Although India has expanded its oil purchase basket, Gulf origin crude oil is providing a logistics edge as the travel time is about 5 to 7 days compared to 25 to 45 days for shipments coming from the Atlantic basin.India depends on imports for about 80 to 85% of its LPG consumption, with most of these supplies coming from Gulf producers and almost entirely passing through the Strait of Hormuz. Unlike crude oil, India does not have strategic LPG reserves on a comparable scale, making the LPG supply chain more vulnerable from a logistics perspective in the event of a disruption.At present, the government has said that India is in a ‘comfortable position’ with respect to its energy security, with supplies of petrol, diesel and strategic reserves to meet the needs.
China is the largest energy-importing country globally, which may suggest it would be particularly exposed to rising crude oil and natural gas prices due to the conflict involving Israel, the United States and Iran.However, according to Clyde Russell’s Reuters column, the situation is likely to play out differently. China’s extensive crude oil reserves provide a substantial buffer against sudden price rises, reducing the risk that energy-driven inflation will have a significant impact on other economies.In the event of a prolonged disruption in Middle Eastern oil supplies, Chinese refiners could potentially benefit by increasing exports of refined fuel. The analysis said if export-oriented refineries in parts of Asia, including India and Singapore, face constraints due to limited crude oil availability, China would be in a position to process oil from its reserves and export products such as diesel and gasoline, taking advantage of higher fuel prices.China also has additional strategic advantages. It remains the main buyer of concessional Russian crude that is subject to sanctions and remains a potential destination for Iranian oil shipments that managed to leave the Strait of Hormuz before the recent Israeli and US attacks.
