Crude oil price forecasts: Some predict $350 if Strait of Hormuz is blocked

Talk of a possible disruption to traffic in the world’s most vital oil cargo route, the Strait of Hormuz, has resurfaced as markets and traders await the next move in the Israel-Iran conflict.

An Iranian blockade, or an attempted blockade, of the narrow strait between Oman and Iran, which connects the Persian Gulf with the Gulf of Oman and the Arabian Sea, could easily send oil prices over $100 a barrel and reaching historic highs, say the analysts. .

However, the same analysts see a disruption of the Strait of Hormuz as a low-probability event – for now.

The chances of traffic chaos in the strait, through which 21% of the world’s daily oil consumption passes, are low, but if the worst were to happen, the impact would be large — not only on oil prices, but also on natural gas markets, as LNG from Qatar passes through the lane.

The Strait of Hormuz, which sees an average oil flow of around 21 million barrels per day (bpd), is rightly described as the world’s most important oil transit choke point. It is the main oil export route from the Middle East to Asia and the key export artery of all major producers in the region, including Iran itself.

Related: Oil slips as EIA confirms large rise in crude inventories

But only Saudi Arabia and the United Arab Emirates (UAE) have pipelines in operation that can bypass the Strait of Hormuz, the US Energy Information Administration says.

Iran inaugurated the Goreh-Jask pipeline and Jask export terminal in the Gulf of Oman with a single export cargo in July 2021. The pipeline’s capacity was 300,000 bpd at that time, although Iran has not used the pipeline since then, the EIA notes.

In the event of a supply disruption, the EIA estimates that approximately 3.5 million bpd of effective unused capacity from these pipelines could be available to bypass the Strait of Hormuz.

It’s not enough to make up for even one day of possible downtime.

Currently, the oil market does not believe there is a supply shock in the Strait of Hormuz, although in a worst-case scenario, what is now seen as low probability could turn out to be a disruption of high-impact proportions.

“The rule of thumb in commodity markets is that if supply is severely constrained, the price will often rise to 5-10 times the normal level,” Bjarne Schieldrop, chief commodities analyst at Sweden’s SEB bank, wrote in a note last week .

“So if the worst were to happen and the Strait of Hormuz was closed for a month or more, Brent would probably rise to $350/b, the world economy would collapse and oil prices would fall again under $200/b. in a while.”

“But seeing where the price of oil is right now, the market doesn’t seem to have much likelihood of such a development,” Schieldrop said.

The risk appears remote, while both the US and China would reopen the strait if it is blocked, the analyst added.

A significant disruption to flows through the Strait of Hormuz would jeopardize 14 million barrels per day of oil supplies from Middle Eastern producers and significant spare capacity in Saudi Arabia and the United Arab Emirates.

Such a disruption “would be enough to push oil prices to new record highs, surpassing the record high of nearly $150/bbl in 2008,” Warren Patterson, head of commodity strategy at ING bank, wrote on Friday.

At present, almost all analysts doubt that the escalation in the Middle East would be so serious as to lead to a blockade of the Strait of Hormuz.

“Will the US really allow Israel to blow up oil facilities on its antagonist’s border during an election year? It will effectively close the Strait of Hormuz to Iran, which will not only cut off its neighbors’ exports, but its only notable source. international income?” say analysts from oil brokerage PMV.

“The extent of the war and its damage will have to be proven before oil market participants shake off the overwhelming presence of skepticism.”

By Tsvetana Paraskova for Oilprice.com

More top reads from Oilprice.com