The Strait of Hormuz, a waterway often described as the most sensitive choke point for global crude oil supplies, was thrown into the spotlight again Thursday after the U.K. Defense Ministry said a British warship scared off three Iranian vessels that attempted to block the passage of an oil tanker through the Persian Gulf.
The ministry said the warship trained its guns on the vessels after they attempted to impede the British Heritage, a U.K.-flagged tanker carrying oil for British petroleum company BP PLC BP, +0.04% BP, +0.02% .
Oil futures rose in early morning trading following the incident, but subsequently pulled back. The U.S. benchmark CLQ19, -0.38% was little changed, while global benchmark Brent crude BRNU19, -0.69% was down 40 cents, or 0.6%, in recent action.
Here’s what investors need to know about the Strait of Hormuz.
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.
Why is it in the news?
Tensions in the region have been on the rise following the U.S. decision to reimpose sanctions on Iran over its nuclear program. The U.S. has accused Iran of attacking vessels in the region.
Iran last month shot down a U.S. military drone. President Donald Trump called off a retaliatory strike at the last minute, citing concerns the expected fatalities wouldn’t be proportionate to the donwing of an unmanned aircraft.
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.