Why tension around Strait of Hormuz moderately affects oil prices?
Baku, Azerbaijan, July 25
By Leman Zeynalova – Trend:
The factors explaining the moderate increase in oil prices as a result of the tension around the Strait of Hormuz are the rise of US oil production, less favourable prospects for global economic growth and trade tensions between the U.S. and China, Francis Perrin, Senior Fellow at the Policy Center for the New South (PCNS, Rabat) and at the French Institute for International and Strategic Affairs (IRIS, Paris), told Trend.
“The price of North Sea Brent for September contracts was about $64 per barrel. Brent price rose over the past few days and it was partly due to tensions in the Gulf region. That being said the rise in oil prices is not huge despite about 10 incidents involving ships in the Gulf, in Hormuz or just outside Hormuz since May 2019. Normally such a number of incidents in this region should push oil prices at much higher levels. The factors explaining this moderate increase are the rise of US oil production, less favourable prospects for global economic growth and trade tensions between the U.S. and China. So far the world oil market remains well supplied despite these problems in the Gulf,” he said.
Perrin pointed out that the Strait of Hormuz is very important because it is the main export route for oil exported by several Middle Eastern key producers such as Saudi Arabia, the United Arab Emirates, Kuwait, Iraq, Qatar and Iran.
“It is also the export route for liquefied natural gas (LNG) exported by Qatar, which is the leading LNG exporter. The Middle East controls about half of the world's proven oil reserves and a little more than 40 percent of the world's proven gas reserves. Oil exports through Hormuz represent about 20 percent of the world oil consumption, about 25 percent of global oil exports and about 30 percent of global oil exports transported by tankers. As oil is the leading energy source in the world Hormuz is the most strategic strait,” the expert explained.
He recalled that tensions are rising in this part of the world since May 2019: about ten incidents involving ships, an attack on a strategic pipeline in Saudi Arabia, a US drone destroyed by the Iranians, an Iranian drone destroyed by US forces, a strengthening of the US military forces in the region, some violations of the 2015 nuclear deal by Iran and tensions between the UK and Iran which add up to tensions between the US and Iran and between Iran and some Arab countries.
“Measures which will be taken or which could be taken include the protection of tankers in the Gulf, the strengthening of international cooperation around this protection goal, diplomatic initiatives in order to lower the pressure in the region and to establish a political dialogue, the use of strategic oil stocks by the International Energy Agency (IEA) and perhaps military action against Iran. At this stage these two latest points are not being actively considered but...,” Perrin concluded.
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