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The biggest black swan in the oil market: the strait of hormuz

The biggest black swan event in the oil market was the disruption of the strait of hormuz, the most critical chokepoint for the Middle East, according to an analyst at S&P Global.

“Any disruption to shipping in the strait of hormuz would be a major shock to the market,” Dave Ernsberger, the firm’s global head of commodity pricing, said on Thursday.

The strait of hormuz is an important channel for producers to transport oil from the Middle East to other parts of the world. It is 21 miles wide at its narrowest point, and about 21 million barrels of oil were transported through the waterway every day in 2018, according to the U.S. energy information administration.

Iran has repeatedly threatened to block it in the event of war. If the strait of hormuz were blocked, Iraq’s export routes would be almost completely cut off, leaving Kuwait and Qatar second only to Iraq.

In the first half of 2019, China imported 9.9 million barrels per day of crude oil, and crude oil from Iraq, Kuwait, the united Arab emirates and Qatar totaled 1.6 million barrels per day, up 8 percent year on year from 2018. If the strait of hormuz is blocked as a result of an escalation in the us-iran conflict, the supply disruption will force China to reduce crude oil imports from Iraq, Kuwait and the united Arab emirates, instead turning its attention to Saudi Arabia, Russia and the us. Supply risks will send international oil prices soaring, while the increased concentration of crude oil imports will also affect China’s energy supply security.

“If we see the geopolitical situation pick up and someone starts to block the channel, it will lead to a panic in the market that we haven’t seen in 10 or 15 years,” he said.

Analysts believe oil prices could soar above $100 a barrel if Iran closes the strait. Asked about the biggest “black swan” event in the oil market, Mr Ensberg said: “there is no doubt that everyone thinks it is.” Black swan events are rare and unpredictable events that can have a severe impact on financial markets.

He added: “it came into view this week and will be the focus of the market for the rest of the year.” Tensions between Washington and Tehran rose last week after a U.S. air strike killed Iranian general omar suleiman. Iran responded by firing more than a dozen ballistic missiles at U.S. bases in Iraq, but there were no casualties.

The situation appears to be easing after U.S. President Donald trump announced more sanctions rather than military retaliation against Iran.

“This is what everyone is watching for the next few months,” he said, adding that the strait of hormuz had not been targeted and that it might have been a “close call.”

“In this political environment, everyone knows that this is a vulnerable throat, and vulnerable spots can really be at work,” he said.

Ford Austin

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