Hormuz risk escalates again, oil price returns to US$100, Gulf countries accelerate reconstruction of crude oil export network
As the war with Iran escalates again, Brent crude oil prices exceeded $100 a barrel on Thursday for the first time since May this year, well above the level of about $72 after a brief ceasefire in June. The rise in oil prices comes as a result of a sharp drop in the number of ships passing through the Strait of Hormuz, which before the war was responsible for about a fifth of global trade in oil and liquefied natural gas (LNG). The U.S. Energy Information Administration (EIA) calls it "the most important oil chokepoint in the world."
As the war with Iran escalates again, Brent crude oil prices exceeded $100 a barrel on Thursday for the first time since May this year, well above the level of about $72 after a brief ceasefire in June. The rise in oil prices comes as a result of a sharp drop in the number of ships passing through the Strait of Hormuz, which before the war was responsible for about a fifth of global trade in oil and liquefied natural gas (LNG). The U.S. Energy Information Administration (EIA) calls it "the most important oil chokepoint in the world." Victoria Grabenwger, a senior researcher at data company Kpler, said that Gulf oil producers are so dependent on the Strait of Hormuz that "it is no longer a prudent long-term strategy." According to Gulf officials, energy companies and market analysts, at least seven large-scale oil pipeline projects are currently under construction, planning or discussion, aiming to transport crude oil and export it to international markets through routes such as the Red Sea, Suez Canal and Gulf of Oman. Although there are currently two alternative transportation corridors, namely Saudi Arabia’s East-West Pipeline (to the Red Sea) and the UAE’s Abu Dhabi Crude Oil Pipeline (to Fujairah), both are approaching capacity limits. According to EIA data, before the war, the two channels had a combined idle capacity of about 3.5 million to 5.5 million barrels per day. They are now operating at almost full capacity, with a total transportation capacity of about 6.5 million barrels per day. Abu Dhabi National Oil Company (ADNOC) is also accelerating a project that had been started before the war. ADNOC has invested US$3 billion in the project, aiming to build a new oil pipeline with a total length of 300 kilometers to Fujairah, which will be laid in parallel with the existing pipeline and is expected to increase the transportation capacity by more than 1.2 million barrels per day. About half of the project is currently completed. Kpler predicts that the official completion target of early 2027 may be pushed back to mid-2027 as the port itself still needs to be expanded. The agency believes that despite the delayed timeline, the fact that the project was being built at such a rapid pace was only possible due to the current lockdown situation. According to a research report released by Goldman Sachs earlier this month, by 2028, the crude oil export capacity of the Gulf region bypassing the Strait of Hormuz is expected to reach approximately 14.2 million barrels per day, equivalent to approximately 60% of the pre-war export volume. The Red Sea relieves stress, but also faces risks However, there are also safety risks associated with shipping via the Red Sea, and this week’s events have once again highlighted this risk. Yemen's Houthi rebels attacked two Saudi oil tankers, the Encelia and the Layla, on Thursday, causing both vessels to catch fire. The Houthis are supported by Iran. In retaliation for Saudi Arabia's blockade of Yemen and attack on Sana'a airport, the Houthis announced a blockade of shipping related to Saudi Arabia. Previously, the Houthis have repeatedly disrupted shipping in the Bab el-Mandeb Strait that connects the Red Sea to the Gulf of Aden. This maritime chokepoint is responsible for about 12% of global trade transportation. In addition, drone attacks launched by the Houthi armed forces in 2019 also forced the closure of the Saudi East-West oil pipeline. Iraq bets on $60 billion cooperation plan Of all the Gulf states, Iraq's push for alternative transport routes has been the most pressing. Since about 90% of government revenue depends on oil exports, and exports are highly dependent on the Strait of Hormuz, Iraq has had to cut crude oil production. Iraqi Prime Minister Zaidi concluded his visit to the United States last week and signed 48 cooperation agreements with American companies, covering energy, medical care, technology and other fields, with a total value of more than 60 billion US dollars. These include cooperation projects with companies such as ExxonMobil, Shell, Halliburton, KBR and GE Vernova. The most high-profile is an agreement between Iraq and Syria to rebuild a long-dormant oil pipeline linking the oil fields of Kirkuk to the Mediterranean port of Baniyas. According to Iraqi state media, the project will be implemented by Chevron. The U.S. State Department welcomed the plan, calling it "a critical energy corridor" with an initial transmission capacity of 2 million barrels per day. In addition, Iraq is also studying the construction of an oil pipeline connecting Basra to Aqaba, Jordan.
U.S. Ambassador to Turkey Tom Barrack said the deals would ultimately render the Strait of Hormuz "irrelevant."
U.S. Ambassador to Turkey Tom Barrack said the deals would ultimately render the Strait of Hormuz "irrelevant."