Crude oil and LNG supplies are vulnerable to worst-case scenarios

Everything depends on the Strait of Hormuz. This chokepoint, which typically accounts for 20% of the world’s crude, products and LNG, is still locked in many ships, leaving energy markets dangerously exposed.

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Under those circumstances, Washington’s or Israel’s claims that they are somehow winning the war against Iran are meaningless.

It may be true that the US and Israeli air campaign has undermined Iran’s leadership and undermined its significant military power.

But the truth is that many ships still cannot safely cross the Strait of Hormuz, while Iran has demonstrated a clear ability to strike energy and other critical infrastructure across the Gulf. That leaves Tehran to create the story — and, more importantly, hold the world economy to ransom at the same time.

What would the worst case scenario look like?

It would be a dramatic escalation in which Iran causes widespread damage to Gulf energy infrastructure, using missiles and drones to hit pipelines, refineries, processing plants and offshore terminals around the region.

The possible cause of such an action would be the US ground forces trying to capture and hold an Iranian-controlled area, such as the Kharg Island oil center and small islands in the Strait of Hormuz.

But even a successful military attack would be useless if it caused widespread damage to electrical equipment, which would increase the already severe market problem into an unprecedented global crisis.

The futures market for crude oil, as shown by Brent contracts, is still very expensive for the drop and eventually return to normal flow through the Strait of Hormuz.

Brent futures opened early in Asian trade on Monday, gaining 2.7% to trade at around $115.55 a barrel, from a close of $112.57 on March 27.

They have now gained 59% since closing at $72.48 a barrel on February 27, the day before the US and Israel attacked Iran.

That may look like a strong rally, but it pales in comparison to physical prices of refined products in Asia, where the biggest impact of the current crisis is still being felt.

Singapore sold jet fuel ended at $222.77 a barrel on March 27, not far from the record $227.98 reached on March 23 and more than double the $93.45 from March 27.

Gasoil, the building block of diesel, ended at $ 182.76 a barrel on March 27, almost twice $ 91.42 on February 27, while gasoline ended at $ 130.52, up 65% from the day before the war began.

These prices show that Asian refiners are still searching for enough crude to operate, while importers such as Australia and Indonesia rush to acquire supplies.

ATTENTION THE COURT

The pressure on Asian refined products markets shows that the fallout from the Iran war has hit the region first, which is not surprising since Asia is the destination for about 80% of the refined and refined oil shipped through the Strait of Hormuz.

But the pain felt in Asia will soon spread around the world, as refiners and oil exporters pull scarce supplies from the Atlantic Basin, pushing prices higher across the region.

The problem is that the world is down well around 12 million barrels per day (bpd) of crude and refined products.

This is because around 19 million bpd have been passing through the Strait of Hormuz in recent months, a flow that has slowed to a trickle, with only a handful of ships passing through so far in March.

The accumulation of Saudi Arabian exports in Red Sea ports and the United Arab Emirates boosting exports from Fujairah in the Gulf of Oman has reduced some of the losses significantly.

But the fear of losing more than 10% of the world’s negative supply cannot be eliminated by freeing up other strategic resources, at least not in the long run.

The real danger is that the conflict with Iran continues, or escalates, in the coming weeks.

Imagine a US ground attack causing Iranian missiles on Saudi pipelines to the Red Sea, or on key facilities in Fujairah.

Or consider Iran’s Houthi allies in Yemen by closing the Bab el-Mandeb route between the Red Sea and the Gulf of Aden, a move that would mean Saudi exports could only flow north through the Suez Canal, increasing time, cost and congestion for goods to Asia.

The risk is that the crude oil and LNG markets may have to start pricing in a sustained loss of supplies from the Middle East, something they have not fully done yet.

The views expressed here are those of the author, a Reuters correspondent.

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