As US-Iran tensions flare up, vessel transits through Hormuz crash to pre-MoU levels. Here’s why

With the renewed flare-up in tensions between the US and Iran, vessel movements through the critical trade artery of the Strait of Hormuz have crashed to the lowest in nearly a month, to levels seen before the US-Iran Memorandum of Understanding (MoU) took effect in June. According to vessel tracking data from commodity market analytics firm Kpler, there were just 14 vessel crossings on Sunday (July 12), down from 24 on July 11 and 19 on July 10. As per data from S&P Global, the last time ship transits were lower than this level was on June 14, three days before the US and Iran inked their peace deal MoU on June 17.

The fall in maritime traffic through the Strait of Hormuz, which usually accounted for a fifth of global oil and liquefied natural gas (LNG) flows before the West Asia war broke out on February 28, has also sent oil prices higher as the market is again forced to contend with concerns of highly-constricted energy flows. As of Monday evening, Brent futures was about $80 per barrel, up about 4%. Since mid-June, vessel movements through the strait had risen meaningfully, even crossing 90 on June 24, with the average being between 40 and 50 on most days, industry data shows. But these were still lower than the pre-war levels of up to 140 daily transits.

Security concerns

A few vessels came under attack last week by Iranian forces sailing outside the shipping lanes authorised by Tehran. The US has been responding to the Iranian attacks on vessels by striking Iranian military targets, and Tehran has in turn been targeting US assets in other West Asian countries. To that extent, the US-Iran MoU has effectively crumbled, raising security concerns among shippers. Moreover, Iran announced over the weekend that it was closing the strait to commercial vessels.

The critical energy trade artery had been free for navigation prior to the war that began late February, but since then, Iran has been claiming sovereignty over parts of the narrow waterway between the country and Oman. During the war, Iran actively regulated the flow of vessels through the strait, allowing only a handful to pass, that too using routings dictated by it. Following the June MoU with the US, Iran continues to insist that vessels should cross the strait only through the routings designated by it, and that too after seeking its permission. Tehran also plans to impose a service fee for transits, but at a later date.

On the other hand, the US and its allies have been encouraging vessels to use the strait’s waters hugging Oman as an alternative to Tehran-designated lanes. The stark differences in the MoU’s interpretation and the vagueness in its terms have now emerged as the flashpoints in the uneasy ceasefire. Maritime data shows that ever since last week’s fare-up, even the vessels crossing the strait are mostly doing so using paths designated by Iran.

“Confirmed Strait of Hormuz crossings declined by around 52% week on week over 10 to 12 July, with traffic reverting to more defensive routing patterns. Use of Iranian and dark routes increased while activity on IMO (International Maritime Organization) and Omani corridors almost disappeared,” Kpler noted. Dark shipping refers to vessels moving while keeping their Automatic Identification System (AIS) transponders off in a bid to avoid detection.

“The escalation is no longer confined to the Strait. Iranian retaliation has reached four Gulf states and Jordan, Qatar has suspended all maritime activity for the first time in the conflict, and the southern corridor, sustained through most of the reopening period by US escort under Project Freedom, has effectively collapsed, with only one of 12 outbound vessels using it on July 11,” maritime intelligence provider Windward said in a note on Sunday.

Surging prices

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Apart from the grappling with a physical supply disruption, soaring energy prices due to the West Asia crisis have hit India hard. Around 40% of India’s crude oil imports, 60% of its LNG imports, and a whopping 90% of its LPG imports came from West Asia through the strait. The country’s dependence on imports stands at over 88% for oil, 60% for LPG, and about 50% for natural gas, which is imported as LNG.

India, like various other nations, has been wishing for a quick end to the conflict and a rapid normalisation in global energy flows. While highly diversified crude sourcing has helped ensure adequate oil supplies, the government was forced to ration gas supplies to certain industries and commercial consumers to ensure adequate availability for households and some priority sectors, and even take some emergency measures to prevent panic buying of fuels. As the situation visibly improved following the MoU, some of these measures were recently rolled back by the government.

Moreover, the surge in international prices forced India to import oil and gas at extremely high rates, as the country had to prioritise supply security over price considerations.

As India imports 1.8-2 billion barrels of crude oil a year, every $1-per-barrel increase in oil prices bumps up the country’s oil import bill by up to $2 billion on an annualised basis. According to a March report by Nomura, India is among the three most vulnerable Asian economies to high oil prices in terms of import bill and current account balances, the other two being Thailand and South Korea. It said that every 10% oil price increase typically widens India’s current account deficit by 0.4% of the GDP.