Explaining The US-Iran Standoff Over The Strait Of Hormuz

What the tensions are about and how they will affect India and the world

On Sunday, the United Arab Emirates (UAE) reported that four commercial vessels were targeted by “sabotage operations” near the territorial waters of the UAE without causing casualties at around 6 am.

According to the UAE ministry, the incident occurred near the UAE’s Fujairah emirate, one of the world’s largest bunkering hubs which lies just outside the Strait of Hormuz.

The strait is a vital global oil and gas shipping route, separating the Gulf states and Iran, which have been embroiled in an escalating war of words with the United States over sanctions and the US military’s regional presence.

Important Oil Artery

According to Rystad Energy, independent energy research and business intelligence firm, around 40% of the world’s traded crude oil is transported through the Strait of Hormuz between Iran to the north and UAE and Oman to the south.

In other words, between 17 million and 18 million barrels per day of crude oil pass through the Strait of Hormuz, including 90% of Saudi Arabia’s output and 75% of Iraqi exports, in addition to all oil exports from Iran, Kuwait, Qatar and Bahrain.

The Strait of Hormuz is crucial as there are no alternative routes and the pipelines owned by the UAE and Saudi Arabia cannot carry as much oil as tankers, and while Saudi Arabia and Iran have alternate seaports, their neighbours do not.

This means that any sign of friction in the Strait has the potential to make global oil prices high and also add to the woes of heads of states.

Dangerous Development

“Subjecting commercial vessels to sabotage operations and threatening the lives of their crew is considered a dangerous development,” according to the statement uploaded by WAM, the official news agency of UAE.

Meanwhile, media reports quoting shipping sources identified the Saudi vessels as Bahri-owned very large crude carrier tanker Amjad and crude tanker Al Marzoqah.

Tanker industry tracking sites show the Amjad is currently anchored several kilometres off Mirbah near Khor Fakkan and Al Marzoqah anchored off Fujairah port.

The two other ships have been identified as the A Michel - registered in Sharjah - and the Andrea Victory from Bergen in Norway.

The Norwegian tanker suffered hull damage after being struck by an unknown object at the waterline, its managers, Thome Ship Management, said in a statement.

Fujairah Port ‘Attack’

On Sunday morning itself, there were unconfirmed reports that some 10 oil tankers anchored at the Fujairah port were in flames.

Social media posts claimed that American and French warplanes had been flying over the port at the time of the incident.

The reports of fire and explosions, apparently originated in Al Mayadeen, a Lebanese broadcaster and news outlet regarded as pro-Hezbollah.

They were picked up and reported by Sputnik news, which is funded by Russia, and spread across social media by pro-Iran Twitter accounts.

Fact checks reveal that an image of a flaming tanker purporting to be evidence of the attack was a picture of a tanker called the Kashmir on fire in Jebel Ali in 2009.

Among the comments spread by some accounts along with the news stories were warnings that it was not safe to travel to the UAE and that air travel had been severely disrupted.

The UAE Foreign Ministry described the claims as “baseless and unfounded.”

It was only on Monday that Saudi Arabia’s official news agency quoting its Energy Minister confirmed that two Saudi tankers were targeted in a “sabotage attack” off the coast of the UAE.

Minister Khalid Al-Falih said the two tankers were targeted off the coast of Fujairah and explained that one tanker was en route to the Kingdom to be loaded with Saudi crude oil to send to the United States to supply Saudi Aramco customers.

“Fortunately, the attack didn’t lead to any casualties or oil spill; however, it caused significant damage to the structures of the two vessels,” Al-Falih said.

Trump Warns Iran

The same day, following the ‘sabotage’ and countries rallying behind Saudi Arabia, US President Donald Trump warned Iran, saying that if Teheran does “anything” in the form of an attack “they will suffer greatly.”

“It’s going to be a bad problem for Iran if something happens,” Trump told media in the Oval Office.

Earlier, the US had warned that “Iran or its proxies” could be targeting maritime traffic in the region and foreseeing that, America was deploying its warships to the Persian Gulf to counter alleged threats from Teheran.

On May 05, the White House had issued a communiqué announcing that a battleship-carrier strike group, led by the USS Abraham Lincoln, and a bomber task force, including B-52s, were deploying off Iran’s coast.

On May 10, the Pentagon had also announced a second display of force: the USS Arlington and a battery of Patriot missile systems would join the Abraham Lincoln.

Meanwhile, ISNA, a news agency in Iran, quoting a senior Iranian Revolutionary Guards commander reported on Sunday that the US military presence in the Gulf used to be a serious threat but now represents a target.

“An aircraft carrier that has at least 40 to 50 planes on it and 6000 forces gathered within it was a serious threat for us in the past but now it is a target and the threats have switched to opportunities,” said Amirali Hajizadeh, head of the Guards’ aerospace division.

“If (the Americans) make a move, we will hit them in the head,” he added, according to ISNA.

And on the tanker attack, Iran on Monday said that it is “alarming”. The incidents are “alarming and regrettable,” Iranian Foreign Ministry spokesman Abbas Mousavi said in an English-language statement on the ministry’s website, calling for a probe into the attacks and warning of “adventurism” by foreign players to disrupt maritime security.

Pulling Out Of N Deal

This April, Iran had said that it will close the Strait of Hormuz as US is threatening them and last Wednesday Iranian President Hassan Rouhani had said that Iran was pulling out of two 2015 nuclear commitments.

He said the country would keep enriched uranium stocks rather than sell its surplus abroad, as they are required to under the deal. He also said Iran would begin developing its Arak heavy water reactor.

The announcement was made on the one-year anniversary of America’s exit from the agreement.

Rouhani said Teheran will give 60 days for signatories to return to negotiating financial and oil deals. Failure to implement the “promises” will mean Teheran’s partial withdrawal from the deal.

Oil Prices Rising

Meanwhile, oil prices are rising as escalating tensions in the Middle East stoke fears about a global supply crunch.

Supply disruptions in the Middle East on top of an already tight crude market could send oil prices violently upward, according to Rystad Energy.

Commenting on the ‘sabotage’, Bjørnar Tonhaugen, Head of Oil Market Research at Rystad Energy, says that in the short term, the perceived risk of supply disruptions from the area will only add to the premium of short-dated oil contracts compared to deferred contracts on the futures curve, which are already trading at a high premium.”

The tightness in prompt supplies is caused by declines in production from Iran and Venezuela, along with ongoing OPEC cuts, outages in Russia owing to the Ural’s contamination, maintenance in Kazakhstan, plus planned maintenance in the North Sea during the summer months.

“The oil market is reacting today not because the physical market suddenly has lost more oil supplies, but because of risks that the market may lose more oil in the coming weeks and months given the heightened risk of supply disruptions from the critical Persian Gulf region. Raising tensions even higher, news flows suggest the latest incident might be related to the conflict between Iran and the US, which puts the Strait of Hormuz in play,” Tonhaugen said.

The US announced last month that buyers of Iranian oil must stop purchases by 01 May 2019 or face sanctions.

The termination of the so-called Iran sanction waivers program prompted Iran to renew its threat to close the Strait of Hormuz.

“Iran has repeatedly threatened to ‘block’ the Strait as a ‘weapon’, but due to the importance of the waterway for the global economy and the price of oil, the Strait is also protected by the US Navy’s Fifth Fleet and other allies,” Tonhaugen remarked.

“Needless to say, if the strait was to be blocked or disrupted, even if only for a short period of time, oil prices would react violently upwards. There are limited bypass options to export crude, although Saudi Arabia and the UAE do have limited pipeline capacity to shift some crude exports to the Red Sea or the Gulf of Oman.”

However, any disruption to the flow of oil through the Strait of Hormuz would have unknown consequences for the stability in the region. The risk of sparking an escalating conflict implies that the threats being expressed lately are probably of the rhetorical kind, with less likelihood of the “oil weapon” actually being set in motion.

Fears of Disruption

Although the global economy is far less dependent on oil than a generation ago, supply disruptions would have broad economic consequences, largely as a function of the extent of any price increase and prevailing conditions in the global economy.

In a period of weak economic growth – with several major consumer economies on the brink of recession – a sharp oil price spike could tip the global economy into a further slow-down.

The specific GDP impacts would vary from country to country and from region to region depending on economic structure, but there would be many more losers than winners.

Even before any actual physical disruption, however, expectations of insecurity and potential disruption to maritime choke points could drive paper markets for oil.

Fears of disruption to critical maritime choke points are a significant factor in local, regional and global politics.

In the past, market reactions to the threat of disruption have been divergent, and sometimes contradictory.

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