Global Crude Oil Market Adapts to Strait of Hormuz Blockade

The conflict between the United States and Iran has led to a prolonged blockade of the Strait of Hormuz, causing global anxiety and keeping Brent crude prices around $90 per barrel. However, this is a modest increase compared to the peak of over $130 per barrel reached in April.

According to KUTANI Ichiro, Board Member and Director of the Energy Data and Modelling Center at the Institute of Energy Economics, Japan, the market has proven more resilient than initially anticipated. The loss in crude oil supply resulting from the blockade was estimated at 15 million barrels per day.

Saudi Arabia and the United Arab Emirates have utilized bypass pipelines with export capacities of 5 million and 1.8 million barrels per day, respectively. Surprisingly, reports indicate that approximately 5 million barrels per day are still being exported through the Strait of Hormuz itself. Combined, these routes account for 11.8 million barrels per day, effectively restoring nearly 80 percent of the lost supply.

The United Arab Emirates is expanding its bypass capacity by an additional 1.5 million barrels per day, with operations expected to begin in 2027. Saudi Arabia and Iraq are also likely to consider similar expansions to secure their economic lifelines. Despite this resilience, significant risks remain according to Kutani. He says Iran is expected to strengthen its control over ships attempting to evade the blockade to prevent the bypass strategy from succeeding.

The ongoing stalemate has forced oil-producing nations to prioritize the expansion of bypass pipelines to secure their export revenues. Furthermore, the continued upward trend in crude oil production outside the Gulf, particularly in the United States, is playing a critical role in potentially resolving the impact of the blockade. Kutani notes that if production outside the Gulf continues to rise, it would be possible to neutralize Iran’s Strait of Hormuz card.

Ultimately, the emergence of a new normal in the international crude oil market depends on the continued expansion of alternative infrastructure and increased production outside the Gulf, potentially leading to a future where the blockade of the Strait of Hormuz no longer poses a significant risk to global energy security.