Persian Gulf Oil Tanker Traffic May Never Fully Recover

Oil and gas traffic via the Strait of Hormuz may never go back to pre-war levels if Iran cements its hold over the chokepoint. The warnings come from several unrelated sources as the war continues to drag on, with some recovery in traffic but nowhere near pre-February 28 levels. Meanwhile, Big Oil is warning that the looming supply shortage is about to hit global markets in weeks.

“No matter what happens, the Iranians will control the Strait of Hormuz for the foreseeable future,” Amos Hochstein, senior national security and energy advisor to President Biden, told CNBC last week. “It doesn’t even matter what the deal says. Everybody in the region believes that.”

The deal that is currently under discussion between the United States and Iran focuses on extending a ceasefire rather than putting an end to the fighting. Still, differences remain between the two. The BBC reported earlier today that President Trump had requested edits to the text of the deal/ That’s despite Trump saying last week that “The one guarantee that I have to have is that there will be no nuclear weapons. They’ve agreed to that, and it was very interesting.”

While the negotiations drag on, expectations that Iran will remain in de facto charge of the Strait of Hormuz appear to be strengthening. “Any end to the conflict that leaves Iran exercising operational control and influence over the Strait will result in appreciably lower flows through the waterway in our view,” RBC Capital Markets’ Helima Croft said in a recent note, as quoted by CNBC.

The Wall Street Journal, meanwhile, reported last week that the U.S. Navy was “quietly coordinating vessel crossings through the Strait of Hormuz”, as divulged by unnamed sources from the Pentagon. However, these crossings are still nowhere near pre-war traffic levels and do not seem to exclusively involve tankers, contributing to expectations of a prolonged tanker traffic disruption—or even a whole new normal in tanker traffic from the Middle East.

According to the editor-in-chief of Lloyd’s List, Strait of Hormuz traffic could rebound to between 60% and 70% of pre-war levels eventually, but not all vessels would be treated equally. Chinese ships will likely enjoy preferential treatment from the Iranian forces that control the Strait, Richard Meade said, as quoted by CNBC, while Western vessels would need to pay for the right of passage via the strait.

“This doesn’t trigger a recession in the way that some of the doomsday scenarios that we’ve talked about before might suggest, but it does not allow the prewar rebound,” Meade said, adding, however, that “It produces something more insidious. A permanently bifurcated strait where access is a function of political alignment, not freedom of navigation.”

While analysts issue warnings and predictions, Big Oil is sounding an inventory alarm. In the past few days, senior executives from Exxon and Chevron both warned the world’s oil supply is about to start running out in just a few weeks, regardless of what happens between Iran and the United States.

“We’re approaching unheard of inventory levels,” Neil Chapman, senior vice president at Exxon, said at an event in New York last week, quoted by CNBC. “I mean really, really low levels,” Chapman noted. “You can debate whether that’s going to hit, those really low levels, in two weeks or three weeks. Once you get to that point, then you’ll see price shoot up.”

Prices are currently trending down, with Brent crude dropping off recent highs above $100 to just over $93 per barrel at the time of writing. WTI was trading at below $90 per barrel despite the warnings predicting a steady level of $120 to $150 per barrel if the disruption in the Persian Gulf continues.

Chevron’s chief executive also joined the ranks of those warning of shortages. “The buffers and the shock absorbers are being steadily drawn down, and the ability for the market to absorb this imbalance is drastically diminished today versus where we started,” Mike Wirth said last month, as quoted by The Motley Fool, which noted that the U.S. strategic petroleum reserve has been drained steadily, falling to 365.1 million barrels, which is down from 415.4 million barrels before the U.S. and Israel launched the first missiles against Iran at the end of February.

Earlier comments by analysts also pointed to the end of June or the beginning of July at the latest for the full extent of the crisis to be felt globally. Now, Big Oil chiefs are confirming this. “Over the next few weeks, we’re likely to see those pressures flow through more directly to physical prices, and there’s more upward pressure that I would expect as we get into June and certainly into July,” Chevron’s Wirth said. This means oil prices are in for some sharp corrections unless the situation in the Persian Gulf changes, as fundamentals overtake Trump’s social media posts as a basis for trading decisions.

By Irina Slav for Oilprice.com

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