Risks remain to Hormuz traffic
The MOU between the U.S. and Iran could at long last lead to the restoration of oil and gas flows through the Gulf. But there are reasons to think that shipping traffic will take much longer to restore than many think.
The temporary peace deal between the U.S. and Iran promises to restore shipping traffic through the Strait of Hormuz, with oil and gas production at sites in the region beginning to show signs of life. But a variety of political, technical, and security risks remain, which may prevent a full resumption of shipping volumes in the near-term.
The “memorandum of understanding” is light on specifics. It details a 60-day period of calm, a series of financial benefits to Iran, and a lifting of the dual blockades over the Strait. After countless false starts, there are signs that ships may finally begin to enter and exit the waterway.
Qatar has begun recalling LNG tankers back to the Middle East, in preparation for a restart of liquefaction operations. At least four tankers are heading towards Qatar’s Ras Laffan LNG site, according to Bloomberg. Qatar has said that it is planning on rapidly restarting LNG production once the Strait of Hormuz opens, with the goal of ramping up to 50 percent capacity within a month and 80 percent within two months. Roughly 17 percent of Ras Laffan’s capacity was damaged during the war and is expected to take three to five years to repair.
Iraq has already increased oil production from 1 to 1.5 million barrels per day, a signal of confidence in the immediate availability of tankers. The region is gearing up to hit the ground running as soon as the Strait is open.
Initially, hundreds of trapped tankers will be able to depart the region. A more important sign would be for fresh tankers to enter the Strait, which would allow for oil and gas to be loaded and exported. Finally, once those flows are assured, upstream production can restart in a meaningful way. Forecasts run the gamut, but most analysts believe traffic can approach normal operations within weeks or a few months.
But there are many risks, any one of which could spoil the best-case scenarios. There’s good reason to believe “normal” traffic is not imminent.
Top shipping bodies remain on guard. The International Maritime Organization (IMO) welcomed the temporary peace agreement, but also noted that the evacuation of thousands of seafarers that had been trapped in the Strait “will require time.”
Experts say it could take several weeks just for the trapped ships to exit the Strait.
“The statements by the US and Iran are currently unclear and do not offer sufficient information regarding key aspects such as timings and safe routes,” said Jakob Larsen, Chief Safety & Security Officer at BIMCO, the world’s largest direct-membership organisation for shipowners, charterers, shipbrokers and agents. “Due to the lack of details and a history of overly optimistic reassurances, we believe the security situation for the shipping industry remains volatile, and we still consider it very risky for ships to commence transits at this point.”
Other top shipping executives have echoed that conclusion. Shipowners will avoid crossing the Strait of Hormuz in large numbers for several weeks, until safety can be demonstrated, the head of Mitsui OSK Lines, the world’s largest tanker operator, told the FT.
Physical risks remain. Traffic will have to operate through a constricted channel until the waterway is cleared of mines.
“The threat of mines in the area remains a concern immediately as well as further down the line and mine-free routes need to be established,” Larsen said. “Credible assurances from both sides of the conflict must be given before traffic can resume fully to pre-conflict levels.”
The U.S. does not have dedicated minesweeping vessels, and may need to rely on other navies to do some of the work. Clearing the waterway of mines could take up to 30 days or so, analysts say.
On June 15th, the Joint Maritime Information Center, a multinational military coordination body, issued an advisory, with a “severe” threat level, to ship traffic in the Strait of Hormuz. The advisory warned that a ship blockade remained in effect and that there were risks to the safety of crews. “Do not attempt to cross until explicit direction is given,” the notice stated.
Perhaps the largest risk is political. The MOU is a thin piece of paper, resolving very little substance. Discussions over Iran’s nuclear programme, the nature of uranium enrichment, and its ballistic missiles, and its support for non-state actors, among other thorny subjects, can only now begin. One would be hard pressed to find an expert who believes 60 days will be sufficient time to hammer out a durable accord.
Another complicating factor is the Israeli occupation of southern Lebanon. Iran has demanded the full withdrawal of Israel from the country, while Israeli officials are clamoring to continue their war and occupation. Israel has repeatedly bombed Lebanon, at times that are inconvenient for President Trump, threatening to derail negotiations. It is entirely possible that Israel continues bombing Lebanon, a scenario that would strain the MOU between the U.S. and Iran.
“Without the withdrawal of Israeli forces from the territories they occupied during this war, the termination of the war will not be complete,” Iranian Foreign Minister Abbas Araghchi said on June 16th.
Topping it off is Trump’s struggles to sell the deal at home. He’s already taking heat from hawkish U.S. and Israeli factions who believe he has suffered a “humiliation” at the hands of Iran. Belligerent actors could pressure Trump into a return to military confrontation — which would likely lead to a renewed closure of the Strait.
Meanwhile, Iran has more leverage than ever. U.S. intelligence agencies believe that Iran can now shut down traffic in the Strait of Hormuz “at will from now on,” according to CNN. “We have now handed Iran de facto control over the strait – a weapon more powerful than any nuke,” a source told CNN.
Moreover, if talks fall apart, the Houthis in Yemen could seek to close the Bab-el-Mandeb strait, potentially disrupting another chokepoint and taking millions of barrels of daily oil production from Saudi Arabia offline.
Goldman Sachs said its base-case scenario is for LNG supplies in the Strait of Hormuz to “normalize” by the end of July, excluding the 13 million tonnes of capacity that was damaged at Ras Laffan. However, the bank acknowledged there were risks to the forecast.
“Should the blocking of Hormuz largely continue, allowing for an only gradual normalization of flows through 2027, we estimate TTF would likely need to move above 100 EUR/MWh this winter (and average above 50 EUR in 2027) to discourage Asia LNG demand,” Goldman Sachs analysts wrote in a June 16th note to clients.