Strait of Hormuz
Not too long ago I was there on the UAE side and then to the Omani side. I wrote about that trip here, the first two pictures overlooks the Strait of Hormuz into Iran. It was a geological field trip and I avoided the obvious geopolitical discussion. Unfortunately, there is a lot of misconception about the Strait of Hormuz, especially the oil and gas that transports through it in light of the current situation in Iran. I thought I should write about it to make things clear from the scientific point of view that is 100% factual and without any interpretation. If I do any interpretation I will clearly mention that I am doing so, because we must distinguish between facts and opinions. There are too many opinions these days!
When I look at a map of the world's energy trade, my eyes almost immediately settle on a single, astonishingly narrow stretch of water in the Middle East. It's a geographical vulnerability, a geopolitical lever, and perhaps the most important maritime corridor in existence.
It is the Strait of Hormuz.
When you study this map below, the strategic tension is immediately obvious. You have Iran bordering the entire northern coastline, with Oman and the United Arab Emirates controlling the southern shore. At its narrowest point, this strait is just 21 miles wide. Think about that: the maritime lifeline for much of the global economy is narrower than many people’s commute.
But it gets even tighter than that 21-mile width suggests. To ensure safe navigation, massive supertankers can’t just go anywhere. The actual shipping lanes—the designated two-mile wide "highways" for traffic entering and leaving the Persian Gulf—are only separated by a two-mile buffer zone.
Why does this tiny, narrow channel keep world leaders, military strategists, and oil traders up at night? Because of the sheer volume of energy that must squeeze through it every single day. However, this is where it get complicated for the rest of the world and gets simpler for the west. If you take a look at the first plot, ~20% of global production passes through the Strait of Hormuz (current daily global production, just north of 100 MMbopd). But....
almost all of that goes to Asia (mostly China)
Mind you, people are talking all over about supply disruption. But where? Supply disruption is China means nothing, as they have massive stockpile, and their demand, doesn't immediately affect the market. Almost none of it comes to the US today. Please ponder on this fact. Please!
Global Oil Supply and Demand
I made this plot from the data from EIA. This is public information and anyone can visit it. This is the direct link...
https://www.eia.gov/outlooks/steo/data/browser/#/?v=30
Important thing of note that the demand curve (blue) very closely follows the supply curve (red). It should. That is a hallmark of a stable market. It is in fact my job description. My job description and same of thousand other global oil and gas industry professionals all over the world. If those two curve detach from each other too much, bad things happen! For example, March 2020, the Covid pandemic and lockdown. The demand disappeared overnight, and we couldn't cut the supply fast enough, so prices collapsed (because supply is not very elastic). Every time the supply curve stays above the demand for an extended period, we see price decline.
If you look at the current price of crude oil (above is the weekly chart), you will see that the price is stable to declining. In the industry we typically say $60 oil price is stable and sustainable, between $55 and $90 is where we like to keep it, if that is possible. The current price is very close to that ideal number. There is a lot of oil supply, especially in the US, as we have found a lot of it. We don't need any more, not today, not 5-10 years from now.
So, now I will be sharing opinion. If you think this war is about oil, it is not. Also if you think this war will impact oil prices, it will not. Yes, minor news driven move can happen, as news sells, but there won't be any sustainable move to the upside in the oil prices due this war.
Again, this war is not about oil.
So, what it is about? Now, that is overly speculative for me. I do have some opinions, but I promised that I will not get into opinions and stay within facts. Politics of Middle East is very complex, and if you think you understand it just by reading newspaper and watching TV, I am sorry to tell you that you have mistaken.
