The Strait of Hormuz, the Red Sea, and the Black Sea—Risk Areas in the Oil Market. An Analyst's Opinion

On July 21, Kazakhstan halted oil shipments via the pipeline to the Caspian Pipeline Consortium (CPC) terminal. This decision was made following a series of attacks on tankers in the Black Sea, according to Bloomberg. Up to 80% of Kazakhstan’s oil exports pass through the CPC terminal, the agency notes, adding that the country will have to begin cutting production if the suspension continues through the end of this week.

Earlier this week, the Yemeni Houthis announced a naval blockade of ships from Saudi Arabia in the Red Sea.

Shipping through the Strait of Hormuz—one of the main maritime routes for exporting oil and gas from the Middle East—has also come to a virtual standstill. On July 21, only four cargo ships carrying raw materials passed through the strait, Reuters reported, citing data from Kpler.

In an exclusive commentary for Oninvest, Kevin Morrison, an oil and gas sector analyst at the Institute of Energy Economics and Financial Analysis (Australia), explains how the market can accurately assess current developments.

All of these developments point to a tighter market than during the period when the Strait of Hormuz was closed from late February through mid-June.

CTK’s volumes account for about 1% of global oil supply, but this comes amid further disruptions to fuel supplies in Russia (Russia has halted diesel exports, which account for about 10% of global trade) and in the Middle East.

Oil exports are also falling from other countries—by mid-July, combined exports from the U.S., Brazil, Guyana, and Canada had dropped by 18% from their peak of 13.53 million barrels per day on June 1. Limited commercial crude oil inventories in the U.S. are holding back the country’s exports, as the U.S. prefers to reserve crude for the domestic market, according to data from Kpler.

Overall, oil production in these four countries rose by about 3 million barrels per day from April through early June, helping to curb the rise in oil prices. Currently, a decline in China’s oil imports (which fell by more than 40% in June to its lowest level in nearly 10 years—Ed.) is preventing a sharper spike in crude oil prices. At the same time, however, Chinese refineries have reduced their operating rates and cut exports of petroleum products, which has added tension to another segment of the energy market.

Kazakhstani exports transported via the CPC are shipped to consumers in Europe—specifically Italy, as well as France, Spain, the Netherlands, and Turkey. A portion is sent to the Asia-Pacific region and transported onward to the Red Sea.

This decision by Kazakhstan represents a serious structural vulnerability, especially for countries in the Asia-Pacific region, since the overwhelming majority of them, on top of everything else, receive crude oil through the Strait of Hormuz and the Bab el-Mandeb Strait.

The governments of countries that depend on oil imports will have to revise their import plans.

The market is beginning to price in the risk of major disruptions to oil supplies: the price of Brent is already above $94 per barrel. This is a perfectly justified risk premium: oil traded at roughly this level for most of the period when the Strait of Hormuz was closed. At that time, the market was already operating under heightened tension.

If the price rises significantly above the specified level, it will no longer simply drive up costs but will actually “stifle” demand.

Chevron, ExxonMobil, Shell, and the Italian energy company Eni hold stakes in the CPC. The suspension of Kazakhstan’s shipments via the CPC will not have a significant impact on them, as this represents a relatively small portion of their respective businesses, given their geographic reach and business diversification.

This article was AI-translated and verified by a human editor