Strait of Hormuz closure has sent shockwaves in global markets and with no signs of the US-Israel-Iran war de-escalating, oil prices have been climbing up. The expanding conflict in Iran has brought tanker movement through the Strait of Hormuz to a standstill, sending oil prices sharply higher and underscoring the strategic significance of the vital maritime corridor to global energy markets.The Strait of Hormuz forms the narrow entrance to the Persian Gulf and handles roughly 20% of the world’s oil shipments. Vessels passing through the channel, which has Iran along its northern edge, transport crude and gas from Saudi Arabia, Kuwait, Iraq, Qatar, Bahrain, the United Arab Emirates and Iran. A large share of these exports is destined for Asian economies – and India is particularly seen as vulnerable. Hence, any interruption to navigation in the Strait of Hormuz poses a serious threat to international oil trade flows.
Importance of Strait of Hormuz for global shipping
The Strait of Hormuz is a curved channel that narrows to roughly 33 kilometers, or 21 miles, at its tightest stretch. It serves as the link between the Persian Gulf and the Gulf of Oman, providing ships access onward to global sea routes.Also Read | India’s energy security exposure to Middle East: How much oil, LPG, LNG reserves do we have? Although portions of the strait fall within the territorial waters of Iran and Oman, it is regarded as an international passage open to vessels from all nations. The United Arab Emirates, which includes the skyline-dominated city of Dubai, lies close to this strategic corridor.
For centuries, the Strait of Hormuz has played a central role in commerce, with goods such as ceramics, ivory, silk and textiles traveling from China through the region. In contemporary times, it functions as a key transit point for massive tankers transporting oil and gas from Saudi Arabia, Kuwait, Iraq, Qatar, Bahrain, the UAE and Iran. Most of these energy supplies are shipped to Asian destinations, including China, which remains Iran’s only significant oil buyer.“The scale of what is at stake cannot be overstated,” Hakan Kaya, senior portfolio manager at investment management firm Neuberger Berman told AP. He noted that a limited disruption lasting one or two weeks could likely be managed by energy companies. However, a complete or near-complete shutdown extending for a month or longer would drive crude prices, “well into triple digits” and push European natural gas rates “toward or above the crisis levels seen in 2022.”Although Saudi Arabia and the UAE operate pipelines that can bypass the strait, the US Energy Information Administration notes that “most volumes that transit the strait have no alternative means of exiting the region.”Also Read | 1970s-style oil shock loading? Crude may hit $100 if Strait of Hormuz shuts amid Middle East tensions – what it meansIran has already targeted multiple vessels in the Strait of Hormuz and warned ships against attempting to cross, effectively bringing traffic through the waterway to a halt.“The Strait of Hormuz is closed,” declared Iranian Brig. Gen. Ebrahim Jabbari, an adviser to the paramilitary Revolutionary Guard, warned that any vessel attempting to transit the passage would be set ablaze.
Major global shipping lines have released advisories confirming the suspension of operations in the region. Danish shipping giant Maersk, the world’s largest container carrier, announced on Sunday that it would pause all vessel transits through the Strait of Hormuz until further notice. Other major operators, including Hapag-Lloyd, CMA-CGM and MSC, issued similar statements.Data from Clarksons Research, a firm that monitors global shipping activity, indicate that roughly 3,200 vessels, which is about 4% of worldwide shipping tonnage, are currently idle within the Persian Gulf.
Trump Reaction & Insurance
US President Donald Trump on Tuesday said on social media that he has directed the United States’ development finance agency to offer political risk insurance for vessels transporting oil and other cargo through the Persian Gulf, describing the coverage as being available “at a very reasonable price.”Political risk insurance is designed to shield companies from financial setbacks arising from political instability, government interventions or acts of violence.Also Read | US-Israel-Iran war hits oil supplies: How India is preparing for the economic falloutHe added that the US Navy would provide escorts for oil tankers navigating the Strait of Hormuz if required. The Navy currently maintains a presence in the region that includes at least eight destroyers and three littoral combat ships. These vessels have previously been deployed to accompany commercial shipping in both the Persian Gulf and the Red Sea.
India and China dependence
On the oil, LPG, LNG and trade front, India is vulnerable to the impact of Strait of Hormuz closure. A big chunk of the oil that flows through the Strait of Hormuz every day is headed to China and India. However, the vulnerabilities to the closure of the Strait of Hormuz differ significantly between India and China.
According to global real-time data and analytics provider Kpler, approximately 2.5 to 2.7 million barrels per day of India’s crude imports move through the Strait of Hormuz, primarily sourced from Iraq, Saudi Arabia, the UAE and Kuwait. Incidentally, in recent months, refiners have reduced part of their Russian intake, leading to a higher share of Middle Eastern barrels in the overall import mix. This shift has increased India’s short-term vulnerability to any disruption affecting transit through Hormuz.Shipping data from Kpler shows that Russian crude cargoes remain present in the Indian Ocean and Arabian Sea, including supplies held in floating storage. If inflows from the Gulf were to tighten, Indian refiners would likely be able to redirect purchases toward Russian grades with relative speed. Russia has already said that it is ready to help meet India’s energy needs.Although India has broadened its oil procurement basket, Gulf-origin crude oil continues to offer a logistical edge since voyage time is roughly 5 to 7 days compared with 25 to 45 days for shipments arriving from the Atlantic basin.India also relies on imports for about 80 to 85% of its LPG consumption, with most of these supplies coming from Gulf producers and passing almost entirely through the Strait of Hormuz. In contrast to crude oil, India does not hold strategic LPG reserves on a comparable scale, leaving LPG supply chains more vulnerable from a logistics standpoint if disruptions occur.For now, the government has said that India is in a ‘comfortable position’ with regards to its energy security with supplies of petrol, diesel and strategic reserves available to meet needs.
China is the largest energy-importing country globally, which might suggest it would be especially exposed to rising crude oil and natural gas prices triggered by the conflict involving Israel, the United States and Iran.However, according to a Reuters column by Clyde Russell, the situation is likely to play out differently. China’s extensive crude reserves provide a substantial buffer against sudden price increases, reducing the risk that energy-driven inflation affecting other economies would significantly impact it.In the event of an extended disruption to Middle Eastern oil supplies, Chinese refiners could potentially benefit by increasing exports of refined fuels. Should export-focused refineries in parts of Asia, including India and Singapore, face constraints due to limited crude availability, China would be positioned to process oil from its stockpiles and ship out products such as diesel and gasoline, capitalising on elevated fuel prices, the analysis says.China also holds additional strategic advantages. It continues to be the main buyer of discounted Russian crude that is under sanctions and remains the likely destination for Iranian oil shipments that managed to leave the Strait of Hormuz before the recent Israeli and US strikes.
