Risks rise in key oil chokepoint Strait of Hormuz

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An alleged attack Thursday on two oil tankers near the Strait of Hormuz may increase levels of risk in the Middle East's key crude supply and shipping artery.

 

The Front Altair and the Kokuka Courageous were carrying cargoes including naphtha when the incident occurred. Television footage later showed one of the tankers engulfed in flames.

The incident follows last month's attack on four tankers near the bunkering port of Fujairah on May 12.

US Secretary of State Mike Pompeo blamed Iran Thursday for the attack on the two tankers, as well as attacks a month earlier on pipelines in Saudi Arabia and on ships in nearby waters off Fujairah. Pompeo said the US would raise the attack to the United Nations' Security Council.

"The details remain unclear at the time of writing, but the attacks fit Iran's recent pattern of reacting to tightening US sanctions," said Paul Sheldon, chief geopolitical adviser with S&P Global Platts Analytics.

 

 

"A direct US/Iran conflict (or shutdown of the Strait of Hormuz) both remain long shots, due to Iran's fear of US military action and the US administration's clear aversion to foreign entanglements. But the risk of miscalculation in the Middle East is clearly rising, which will increase the demand for inventory as oil balances tighten in 2H19," he added.

TRADE FLOWS

**The 21-mile wide Strait of Hormuz is the key maritime transit route for Persian Gulf oil exporters.

**The EIA estimates 18.5 million b/d of all seaborne oil exports passed through the strait in 2016, mainly to customers in Asia. Japan, China, India and South Korea are the biggest buyers of the heavier sourer -- or high sulfur -- crudes that Middle East producers tend to supply.

**Iran has issued threats to close the strait in recent months, prompting the US to deploy warships and military aircraft.

**Only Iran and Saudi Arabia have alternative access routes to maritime shipping lanes. Saudi also has access to the Red Sea via the Yanbu Port. Saudi's King Fahd crude export terminal has a loading capacity of 6.6 million b/d.

**Saudi Arabia operates the Petroline (East-West Pipeline) which has a capacity of 4.8 million b/d, a throughput of 1.9 million b/d and an unused capacity of 2.9 million b/d, according to the EIA. This services Yanbu Port. The UAE operates the Abu Dhabi Crude Oil Pipeline, which has a capacity of 1.5 million b/d, a throughput of 0.5 million b/d and an unused capacity of 1 million b/d, the EIA notes.

**The strait is crucial for LNG shipments from Qatar.

**Qatar exported about 6.6 million mt in April, equivalent to about 23.5% of global LNG supply, according to Platts Analytics.

**Qatar supplied some 2.8 million mt to Europe, representing about 40% of its total exports, while the bulk of the remaining 3.8 million mt was exported to Asia.

**Current LNG demand is subdued on limited demand from Europe and Asia for power generation and restocking, following a mild winter which has left healthy storage inventories.

PRICES

**Brent crude futures climbed almost 4% immediately after the attacks on Thursday. ICE Brent eventually settled $1.34 higher at $61.31/b.

**The LNG market was not affected by the incident on Thursday. The Platts JKM was assessed at $4.412/MMBtu at the Thursday close in Singapore, down $0.002/MMBtu from Wednesday's close in London. LNG ships were going through the maritime transit route as usual on Thursday, according to Platts trade flow software cFlow.

**Ship owners are watching the situation closely, but none have reported any changes in daily operations or freight rates yet.

INFRASTRUCTURE

**The Front Altair was scheduled to carry a naphtha cargo from the Persian Gulf to Japan, shipping sources said. Taiwan's CPC Corporation said the 75,000 mt naphtha feedstock cargo was loaded at the UAE's Ruwais port on June 11 and that the company bought it from state-run ADNOC. The cargo was on a CFR basis, according to CPC. ADNOC couldn't be reached for immediate comment.

**BSM Ship Management said the Kokuka Courageous was carrying methanol and had been damaged in the incident, 70 nautical miles from Fujairah in the Gulf of Oman and about 14 nautical miles from the coast of Iran but was not in the danger of sinking.

**Due to the Fujairah attacks in May and the latest attacks Thursday, the Norwegian Maritime Authority has urged Norwegian ships to exercise extreme caution in the region.