With Oil Flowing from 'Hormuz'.. How Does Iran Lose 'A Great Deal' of Leverage?

Analysis by David Goldman from the Afaq News Network - Gulf oil-producing countries, with significant support from the U.S. Navy, are passing massive quantities of crude oil through the Strait of Hormuz, directly under the watchful eyes of Iran. The average flows of oil and petroleum products through this vital waterway reached 13.1 million barrels per day last week, according to data from the maritime tracking company "Kpler."

This quantity represents just under 80% of the total 17.1 million barrels that were crossing the strait daily before the outbreak of war. In this regard, Matt Smith, head of commodity research at "Kpler," stated: "Given the large volumes crossing the strait, it is clear that Iran is losing its influence over it."

This achievement is the result of a complex process involving shuttle transfers under military protection, including a covert crossing - or what is known as "dark crossing" (without electronic tracking) - of the strait; which has helped restore significant flows of Middle Eastern oil over the past two months. Recently, the traffic in the strait has increased due to the return of Saudi oil flows that had primarily been redirected to the Red Sea, before the Houthis in Yemen - Iran's allies - launched an attack on the main Saudi oil pipeline "East-West" earlier this month.

The fundamental question remains: how long can this status quo continue? The U.S. military is dedicating vast resources in the region merely to ensure the passage of oil, while global inventories continue to decline, nearing operational lows, and fuel prices remain at or near record levels.

Meanwhile, Iran - which has been cornered - has begun to respond and attempt to regain the initiative. The market is in a state of anticipation and tension, and it seems that the oil market still possesses unlimited solutions and means to deliver oil to customers, despite the world facing the largest supply shock ever.

Global oil inventories have declined by about two billion barrels during the war related to Iran - according to data from JPMorgan - yet the market has withstood these challenges. The market achieved this remarkable feat through innovative solutions such as rerouting pipelines and military-backed shuttle transportation services, as well as increased production from outside the Gulf region, and most importantly, the significant global decline in demand.

Oil prices remain high at concerning levels, but the innovative solutions devised by the market have prevented crude prices from approaching the record levels seen in 2008. However, the current situation in the Strait of Hormuz cannot last forever.

Oil is a tangible physical commodity, and ultimately market forces will assert themselves. As the rates of withdrawal from crude oil inventories exceed the rates of deposits, the market will eventually reach that critical point that has long been predicted and feared; the point at which inventories become insufficient to meet demand.

When that happens, oil prices will have to skyrocket to curb demand enough to maintain market balance. No one knows exactly when that will occur.

Natasha Kaneva, Head of Global Commodity Strategy at JPMorgan, has stopped trying to predict the matter, as Kaneva acknowledged - in a note sent to clients two weeks ago - saying: "For the first time since the outbreak of the conflict with Iran, we do not have a fundamental view of the situation; we simply do not know how to model the final scenario." Kaneva believes that the essence of the matter is no longer related to the duration of the war, but to the market's ability to provide the actual quantities of oil that customers demand.

The two matters may be interconnected; in the absence of a real solution to the crisis in the Strait of Hormuz, the world will have to pin its hopes on the resilience of market stocks. These market mechanisms provide fertile ground for economic theories and supply and demand analyses, but in practical terms, they have had little impact on people's pockets.

Oil prices have hovered above $90 a barrel throughout the month, spending most of September above the $100 barrier, while gasoline prices are approaching their highest recorded levels since the start of the war. As for diesel – which is facing the repercussions of both the war with Iran and the Russian-Ukrainian war – its price surpassed the previous record earlier this month, becoming significantly higher than $6 per gallon.

The fact that oil prices have not reached $150 (at least not yet) offers little consolation to Americans who have to spend $100 to fill their car fuel tanks, or to companies that bear hefty additional fuel charges for delivery and shipping operations. In the absence of any substantial new information, the market has moved over the past few months based on the prospects of reaching a peace agreement, where U.S. President Donald Trump's repeated statements throughout the war about a potential imminent agreement with Iran to reopen the strait had a huge impact on oil prices; an impact that far exceeded the effect of actual oil barrel movements on the ground.

However, this situation changed somewhat earlier this month when the Houthis bombed the Saudi oil pipeline (East-West), leading to a temporary halt in the flow of about 7 million barrels of oil towards the Red Sea; a quantity that had seen more than half of it redirected away from the Strait of Hormuz. Oil prices approached the $110 per barrel mark before Saudi Arabia revealed an alternative and innovative solution, demonstrating a remarkable ability to adapt to the situation and redirecting the flow of oil to pass again through the Strait of Hormuz.

Meanwhile, satellite images taken on Sunday showed that all seven docks at two major ports – in Yanbu and Al-Ma'jiz – were open and operational. According to 'Kepler', the oil pipeline between the east and west, located on the western coast of the kingdom, indicates a return to its previous production levels.

Kaniva stated in her memo issued earlier this month: "It seems that the alternative solution is currently successful, as long as Iran allows it." Iran, unable to deliver its oil through the strait due to the American naval blockade and losing a key source of its economic influence, has intensified its attacks on oil tankers crossing the Gulf.

Smith pointed out that "it is not surprising that attacks on oil tankers are becoming more common, as Iran seeks to deter transit operations." He added: "We expect this situation to continue as Iran seeks to regain control over the strait." Thus, the oil market remains stagnant: increased American military efforts keep the unsustainable status quo elevated, keeping prices high for companies and consumers.