The six miles of water keeping global markets on edge

Oil prices have climbed after Iran threatened to close the Strait of Hormuz.

On Sunday, after US forces struck three Iranian nuclear sites, Iranian state media reported that Iran’s parliament had approved a closure of the Strait of Hormuz.

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Oil traders see it as a worst-case scenario. Pentagon officials have long warned against it. Vice President JD Vance believes it would be suicidal.

Yet Iranian politicians on Sunday reportedly threatened a closure of the Strait of Hormuz, a strip of water connecting the energy rich Persian Gulf to global markets, after the US joined Israeli strikes on Tehran’s nuclear facilities. That rattled oil markets and sent US stock futures lower on Sunday evening.

Roughly 20 per cent of the world’s petroleum passes through the 20-mile-wide strait, where dozens of skyscraper-size tankers each day funnel into a pair of two-mile-wide traffic lanes separated by a two-mile-wide buffer. The transit through that six-mile strip within the strait includes a similarly huge share of the world’s liquefied natural gas.

The Strait of Hormuz, through which a quarter of global maritime oil trade flows.

Crucial for cars, chemical makers and power plants around the world, the supplies help fuel the oil-hungry Chinese economy and dictate prices paid by US drivers and air travellers. Iran has often harassed foreign-flagged tankers in the area and occasionally threatened to disrupt that trade more broadly in times of stress, a move that could up-end financial markets and send global energy costs soaring.

On Sunday, after US forces struck three Iranian nuclear sites, Iranian state media reported that Iran’s parliament had approved a closure of the strait. But they added that ultimate power to do so lay with the regime’s top security officials.

Many oil traders and energy executives still view the scenario as a scorched-earth tactic and distant possibility. Tanker-tracking firms said Sunday that traffic through the strait was proceeding as usual.

Even so, oil markets remain on edge. The cost of Brent crude futures, the international pricing benchmark, jumped 3.2 per cent on Sunday, trading around $79.50 a barrel. Prices have now climbed about 15 per cent since Israel unleashed its punishing air campaign earlier this month.

US stock futures edged lower, with contracts tied to the S&P 500 down about 0.5 per cent.

“It’s a bargaining chip,” said Anthony Gurnee, a retired longtime tanker-company executive, referring to the strait. “Once they use it, it’s gone.”

Smoke and fire rise from an oil refinery in Tehran after an overnight Israeli strike this month. Picture: Atta Kenare / Agence France-Presse / Getty Images

Gurnee, who served in the 1980s as a US navy intelligence analyst focusing on threats to commercial shipping, said a full closure of the strait by Iran would prompt a swift military response by American warships that have recently moved into the region.

But “I don’t think it’s a three- or four-day operation,” he said. “It could take much longer.” Any disruption to ship traffic could also slow Iranian energy exports, a lifeline to Iran’s economy. Although Israeli strikes have hit Iran’s domestic energy infrastructure in recent days, shipments from the country have continued flowing to oil-hungry buyers in China and elsewhere. Rystad Energy estimates that Iranian exports since the outset of Israeli strikes are actually as much as 30 to 40 per cent higher than typical volumes this time of year.

“Their entire economy runs through the Strait of Hormuz,” Vance said Sunday on NBC, calling a closure “suicidal”. “I don’t think it makes any sense.” Hamidreza Azizi, a visiting fellow at the German Institute for International and Security Affairs said the likelihood of a disruption will ultimately depend on whether the conflict continues to expand – and if the regime itself is threatened in an existential way.

“Strategically, Iran could view short-term economic sacrifice as leverage,” he said. “But it would also sacrifice its sole global energy revenue stream, bear domestic blowback and risk long-term damage to its (reputation).” Naval analysts and tanker operators say the Iranian navy has increasingly projected power using what is called an asymmetric tool kit, including groups of small, speedy boats that swarm larger targets. Mines laid in the waterway could cripple ships, while sunken tankers could potentially block the passage for a longer period.

“They can also storm ships on helicopters and hold them for long periods,” said Erik Hanell, the chief executive of Swedish-based tanker operator Stena Bulk, which has tankers in the area.

Commandos from Iran’s Islamic Revolutionary Guard Corps stormed one of the company’s tankers, the Stena Impero, in 2019 and held it for three months in response to the UK stopping an Iranian tanker in Gibraltar.

“Their entire economy runs through the Strait of Hormuz,” Vance said on Sunday. Picture: Scott Olson / Getty Images / AFP

Ship crews said IRGC speed boats have come within yards of tankers. “They are all over the place,” said Mihai Barbu, an executive officer for a European tanker that is about to enter the strait from its north side. “They can use high explosives on the hull, hit us with rocket-propelled grenades or use heavy artillery from their bases on the coast. It’s scary.” The sabre-rattling has conjured memories of the attacks on oil tankers traded by Iran and Iraq during their conflict in the 1980s. US warships patrolled the region and eventually began escorting some commercial ships, in operations that turned deadly.

Iraqi forces accidentally fired on a US vessel in 1987, killing 37 members of the crew. In 1988, a US ship hit an Iranian mine but managed to stay afloat.

Retired US navy Capt. Jim McTigue commanded a 453ft (140m) frigate that was one of several US vessels that destroyed two Iranian oil platforms in response to the mining incident. Soon after, he said, an approaching Iranian warship let loose a Harpoon missile that buzzed about 100ft past another vessel in McTigue’s group.

McTigue’s ship returned fire with four of its own missiles, helping destroy the largest warship the US navy has sunk since World War II. “They called it a one-day war,” McTigue said of Operation Praying Mantis, which also included additional US ships that fought elsewhere.

As for Iran’s current threat, McTigue said, “I don’t think anybody in a one-on-one tactical situation can even come close to us. You really got to look at the strategic implications. That’s where it’s far more difficult to predict what the outcome would be.”

The Wall Street Journal