Strait of Hormuz Oil Flows Drop Back Near Pre Deal Levels

Crude oil is climbing again as fighting around the strait of Hormuz chokes off tanker traffic that had only just begun to recover. The United States Oil Fund (AMEX:USO), which tracks crude prices, sits at 119.30 dollars, down 1.71% on the day but still within a 52 week range of 102.42 to 154.08 and carrying a relative strength reading of 53.35, a sign the market has not yet decided which way to lean.

In Brief

• Oil flows through the strait of Hormuz collapsed to 3 million to 5 million barrels a day as of July 15, according to Goldman Sachs.
• Brent and WTI futures have each jumped more than 8% over five trading days.
• The US has carried out five straight days of strikes on Iranian military targets tied to shipping threats.
• China cut Gulf crude imports by roughly 5 million barrels a day during the earlier phase of the conflict.
• USO trades at 119.30 dollars, down 1.71% on the day, well inside its 52 week band.

Why the strait of Hormuz matters so much to oil markets

Before the war disrupted shipping, the strait of Hormuz carried about a fifth of global oil trade, close to 20 million barrels a day of oil products, three quarters of it crude. That narrow channel between Iran and Oman has no real substitute route for Gulf producers, which is why any disruption there moves prices faster than almost anything else in the commodity world.

Flows had clawed back to around 10 million barrels a day in early July after a preliminary US Iran understanding signed June 17 raised hopes of normalization. Goldman Sachs strategists led by Daan Struyven say that recovery has now reversed sharply, with the market effectively short 13.4 million barrels a day of Gulf oil compared with pre war conditions.

Fighting resumes and shippers turn cautious

The ceasefire arrangement that briefly calmed the region gave way to renewed US strikes, part of a fifth consecutive day of military action against Iranian targets. US Central Command said the latest wave aimed to limit Iran's capacity to threaten commercial vessels moving through the strait. Iran has answered with attacks on American installations elsewhere in the region.

A second US naval blockade, which started at 4 p.m. Eastern on Tuesday, has already turned back two commercial ships attempting the crossing. Even with Washington insisting the route remains open, shipping companies are avoiding Omani waters, wary of getting caught in crossfire.

Prices react as inventories and China's buying come into play

Brent crude has gained more than 8% in five sessions to trade above 84 dollars a barrel, and WTI has risen a similar amount to top 79 dollars. Lu Ming Pang, vice president of gas and LNG research at Rystad Energy, said markets had bet on a return to normal flows after the June 17 memorandum but that bet has not paid off, and the renewed escalation makes a quick fix less likely.

China, the biggest buyer of crude on the planet, had softened the blow earlier in the conflict by slashing Gulf imports by about 5 million barrels a day. Goldman's team warns that cushion may not hold if Gulf producers start cutting prices to move barrels elsewhere, or if Beijing decides its stockpiling strategy needs a rethink. With fewer inventories available to absorb the shortfall this time, Goldman says any rebound will likely need a combination of weaker demand and renewed drawdowns from storage. Pang put it plainly: as trust in the safety of the strait keeps slipping, traders will have to start pricing in supply disruptions that last far longer than initially expected.

Frequently Asked Questions

Does strait of hormuz have oil?

The strait itself is a shipping channel rather than an oil field, but it is the passage through which crude from Gulf producers such as Saudi Arabia, Iraq, the UAE and Iran reaches global markets.

Does strait of hormuz produce oil?

No, the strait does not produce oil on its own. It serves as the critical transit route for roughly a fifth of the world's oil trade, carrying crude and other oil products pumped from fields around the Persian Gulf.