Analysis: Hormuz Closure’s Ripple Effects on Production

VIENNA (DTN) –With the closure of the Strait of Hormuz amid the ongoing U.S.-Israeli war against Iran, the world has in one fell swoop lost a fifth of petroleum liquid supply. The first ripple effects on oil and gas production can already be felt. U.S. President Trump has vowed to reopen the vital passageway, but the consequences for on the oil complex will are set to far outlive the closure itself.

Crude oil storage tanks in the Middle East are quickly filling up as the region’s key export route remained close for shipping. As a result, producers have begun shutting down operations. Iraq’s crude output has already halved three days into the closure of the Strait of Hormuz, and onshore storage in Saudi Arabia is quickly filling up. The latter is one of the few producers who can divert some production to ports not affected by the shipping disruption.

How soon tankers can freely transit the strait will also dictate how quickly oil output can return. Some fields can restart production within a day, but others will take more time. Typically, the longer a well is idle, the harder it is to restart operations. The delay for natural gas will be considerably longer. LNG exports may need up to a month to reach pre-war capacity, as the restart of gas liquification from a total shutdown can take up to two weeks.

Fighting near oil fields and strikes on production infrastructure could add weeks to the restart timeline.

 Production in the Kurdish part of Iraq – the only region in the country which in the Kirkuk-Ceyhan pipeline has an alternative route for oil exports, has been shut down as a precautionary measure on signs Iran is considering military action in the region which harbors countless dissidents from Tehran and thousands of Iranian-Kurdish armed fighters. Damages to oil infrastructure can considerably extend production restarts, but the Iraqi example proves that credible threats to infrastructure alone are sufficient to hamper output.

While domestic refiners’ dependence on Middle Eastern crude oil has waned over the decades, the U.S. still imports more than 500,000 bpd of crude from the region. Heavy-sour crude from Canada and Venezuela can step in to replace grades like Arab Heavy, and lighter grades are not exactly in short supply given record high domestic production and new projects in Guyana and the North Sea.