Strait Talk: Crisis in the Gulf

Tom: Hello, I'm Tom Reed. I run our China pricing, and analysis and I'm here to discuss the latest events in the Hormuz crisis with my colleagues in Dubai, Nader Itayim and Bachar Halabi. Would you guys like to introduce yourselves?

Nader: Yeah, I'm Nader Itayim. I'm the Middle East Gulf editor and based out of Dubai, been in Argus for about 10 years.

Bachar: And I'm Bachar Halabi. I'm Argus Media's senior correspondent, also based out of Dubai, and I'm going into my fifth year now at Argus.

Tom: Fantastic. So, okay, things are hotting up. I mean, they were already hot, but they're hotting up more. We have the USS Tripoli arriving in the region redeployed from Japan. If I could just start with you, Nader, what do you think this portends? What is the U.S. trying to do here?

Nader: It's the million dollar question. Look, I think right now what we're looking at, when it comes to Iran and the U.S. and Israel, there's a kind of dual track that we're seeing. We're seeing on one hand, a lot of talk about potential diplomacy. I say potential, there's claims that the diplomacy has already begun and we're in the second week of what the Trump administration has been calling diplomacy. But on the other hand, we're seeing, obviously, a lot of military movement into the region. You're mentioning the USS Tripoli.

Right now, this has all come at a time where there's a lot of talk around the potential ground invasion or boots on the ground, so to speak. This is something that, several weeks ago, was outright dismissed as a non-possibility. This was something that Trump administration, I think they never wanted to even contemplate and the U.S. in general, I think. But obviously, as things have progressed, we're now in the fifth week of this war, which is a lot longer than I ever thought this would go.

We have reached a point where I think people are saying, okay, we've reached a point where there are, potentially, I think some can call the current state somewhat of a stalemate, as in what happens next? We haven't necessarily seen some kind of resounding win on either side. And I say that deep in the mind that either side is going into this with different ambitions, different goals. I think that's what makes this a little bit more complicated than you would see into other conflicts. But I think given the fact that we are at the stalemate, I think the Trump administration is probably looking for that kind of win or that kind of big win, you know, the resounding win that would say, "Look, we've done what we came here to do," right?

Tom: Yeah. I mean, there's a lot of talk now about Kharg Island in the Strait of Hormuz off Iran. I wonder if you could just explain to us briefly, Kharg Island's significance, A, and B, I mean, we're not military guys, we're not armchair generals, how challenging though, do you think, knowing the terrain that it would be easy for the U.S. to seize and hold? And then as an addendum to that, what would they be trying to achieve by landing on Kharg Island?

Nader: Right. So, Kharg Island is something... Again, we've just suddenly, it's on the tip of our own tons. What is it? It is of critical importance to Iran. Why? I mean, this is an island that is around 30 kilometers off the coast of Iran. It's sort of the Northern, Mid East Gulf coast of Iran. I mean, it served as Iran's main oil export hub, I think, it's the early, since the 1960s. Essentially, this is, you have pipelines from major producing hubs really feeding into the island, and that's where the oil is gathered, stored, and then loaded onto tankers for export.

Now, I say it's the main oil exporting hub, that in itself I think probably still understates its importance. How much oil essentially runs, oil exports come out of that island or that terminal. I mean, if you're looking at sort of right after the 2015 JCPOA was signed, up until about 2018 when Trump sort of pulled out of the JCPOA, the Iran nuclear deal, there was about 70% to 75% of Iran's crude oil exports and condensate exports were sort of leaving out of that terminal. But in more recent years, since 2023, that has really jumped to about 90% to 94%, or since 2023 to 2025. So, it's huge for Iran.

Tom: If the U.S. seizes that... I mean, I suppose one of the things I'm wondering is, what is the goal there? Is the goal to control the oil? Because surely, the problem the U.S. faces is control of the Strait. I mean, you could control Haug Island. That does not mean you can get oil out through the Strait of Hormuz, right?

Nader: Right. So, the question you ask is the question everyone needs to ask themselves, what are they doing this for? Is the purpose of this essentially to seize back control of Haug Island, or is the intention to, basically, clip Iran's wings, and essentially remove its utmost source of revenue. So, essentially going into Haug Island and taking it over would do that. It would, basically, kill off the biggest source of revenue for Iran, for the Islamic Republic. And, I guess, the idea here would be, if you do that, then you weaken them going forward when it comes to any fighting, so on and so forth. But if it's directly to go and solve the immediate problem that the world has, which is reopening the Strait of Hormuz, yeah, I think many people would question whether that taking that particular Island would solve that problem.

There are many other Iranian islands in that body of water in the Mid East Gulf and also closer to the Strait of Hormuz, which potentially, if the purpose was to reopen it by force, would probably make more sense. I mean, we're talking about the actual island, Hormuz Island, we're talking about maybe Larak, which is really close by as well. There are three islands that we're hearing about that the, you know, Iran and the UAE have been sort of quarreling over for years, the greater and Lesser Tunb Islands and Abu Musa. These are all smaller islands that would, potentially, serve that purpose better.

Tom: And how practical would it be for the U.S. to take and hold those islands? Is that something... I mean, Iran would have prepared for this topographically, is this easy terrain or would they be kind of, you know, fish in a barrel, any U.S. soldiers landing there?

Nader: Yeah, I like that, the imagery. Yeah, you're right. I mean, this is the thing, it's none of us here, as you're saying, armchair generals, we're not, but just looking at it simply, Iran has been fortifying this island over the last few days and weeks, which makes things, obviously, more complicated than they would be. But also, with it being so close to the coast here, I mean, they would be sitting ducks. I'm not saying it's impossible, but it would be incredibly difficult to do. So, yeah, I think they'd have to think not twice or three times before these such a thing.

Tom: The other question that occurs to me, and I really want to come on to Bachar to talk about the flows in a second, but the other thing that occurs to me is, strategically, if you cut off Iran's source of oil revenue, and bearing in mind that Iranian oil is presently really the only barrel coming out of the Strait and, you know, you would have seen an immediate and material effect on the price. Even if you did that as the United States, even if you choked off that flow of revenue, does it end Iranian resistance?

Nader: I don't think it would immediately end offering a resistance, but it would make it harder over time. I think Iran has been in a situation where it has, obviously, been under incredibly harsh sanctions for years, if not decades. Obviously, there's been some windows in the last past few decades where things have been a little bit easier, but the Iranian economy is under incredible, was under incredible strain well before this even began. I think looking at Iran late last year, it was just dealing with the most incredible number of crises all at once. And people were thinking that this is the economy of this country is about to, you know, often at the seams without any kind of intervention from abroad. So, I think it would do major damage or add to the current damage that already exists. So, I think over time, certainly, it would erode Iranian resistance, both militarily and otherwise.

Tom: Yeah, but there's already a sort of siege mentality. That's really interesting. Now, Bachar, I mean, I mentioned just now rather glibly, that Iranian oil was the only oil getting out of Hormuz. To what extent is that actually true?

Bachar: It is actually true, Tom. It is true until perhaps the last few days when the U.S. administration and the president Trump started speaking about presence that Iran is offering. It was mentioned first that they reached an agreement for 10 Pakistani flag tankers to pass through the Strait. And earlier today in an interview, he mentioned another 20 tankers, Pakistani flag tankers will also pass through the Strait. And he said they had already started passing through the state. Now, where does the oil come from in those tankers? I don't think we still have an answer, but it seems that Pakistan, who's technically now playing a mediation role between the United States and Iran in order to at, least, try to reach some sort of a ceasefire agreement or an off-ramp, is now playing also the role of trying to ensure the safe passage of minimal quantities perhaps, or not significant enough quantities through the Strait of Hormuz in general.

So, this is the oil that's passing right now besides the Iranian oil that's passing as well. We know that most of the tankers within the Strait have been, over the past few days and weeks, turned into storage facilities because the countries around the Middle East Gulf region, whether it's Iraq, Kuwait, UAE and Saudi Arabia, they did not want to immediately start shutting down their production or decreasing, excuse me, their production. So, they resorted to filling up those tankers and turning them into storage facilities until eventually, they had to anyway start reducing production in general.

Tom: But I mean, which is all good and positive, I suppose. Ultimately, it doesn't matter whose molecules are coming out on those Pakistani tankers, but it is still 700,000 barrels per day down from, what was it, 15 million barrels per day? So, we've got a little bit trickling out in the form of Iranian presence. And we've also got some oil coming out of Fujairah, I believe. And we've got some out of Mina Fahal in Oman, and we've got some out of Yanbu on the Red Sea coast from Saudi Arabia. Is it possible to kind of quantify those quantities relative to the amount that was coming out before?

Bachar: So, as you mentioned, we had, roughly 15 million barrels per day coming out of Hormuz before the war. Right now, the picture has drastically changed because of that closure of this Strait. To start with, Iran is technically exporting around 1.6 million barrels through the Strait. That's according to Kepler tracking records. In addition to around 1.8 million barrels that are being exported out of the ATCOP pipeline, which connects Habshan to Fujairah in the UAE, there isn't enough information to confirm whether this is a daily process or whether there are interruptions because the pipeline and the Fujairah port, in general, has been targeted repeatedly by drones. And some of those drones perhaps did not come from Iran itself, which raises the question as well to, where did those drones come from within the region?

Moving on to Saudi Arabia, we reported this weekend that the east-west pipeline, which has the nameplate capacity of 7 million barrels per day, has been, for the past two, three days moving oil at maximum capacity. Out of those 7 million, we have 5 million that the Saudis are starting to export, mostly headed towards Asia, in general. And then the two remaining million are directed to refineries within Saudi Arabia, out of which around 900,000 barrels are being also exported to the world in general. So, if we look at this big image, we have 5 million from Saudi Arabia, around 1.8 million from the UAE, 1.6 to 1.7 from Iran. And then there's the extra 700,000 which are now present for President Trump. And this keeps us way below the average, the daily average of the passage of oil through the Strait of Hormuz.

Tom: I think that raises a really interesting question. Just I'd like to come back to Nader briefly, if I may. And I know I'm not an expert in the region and this may be a stupid question. The east-west pipeline in Saudi Arabia, the ATCOP pipeline in UAE, these must be strategic targets. Are they in danger?

Nader: Are they strategic targets? Absolutely. I think they would be. As Bachar mentioned, when it comes to ATCOP, it has been more in the line of fire over the past few weeks. Thankfully for Saudi Arabia, thankfully for the oil markets, when it comes to the east-west pipeline, we have not necessarily seen targeting of this pipeline itself, but what we have seen is targeting of elements that are in Yanbu, which obviously, is where the east-west pipeline extends to. And that is where all the loading, or the vast majority of crude loading in Saudi Arabia is at the moment coming out of. So, there has been warning shots, whether it be from Iran or any of its proxies in the region, that we can target these facilities as and when we want to. So, I'd like... We call them warning shots at this point.

Tom: I mean, this could suddenly become very urgent, right? Because President Trump is talking about targeting Iranian power plants. At that point, do these key pipelines become valid targets for Iran, do we think? Is it a matter of choice?

Nader: Yeah, it depends what you mean about valid, because, you know, all's fair and, what is it, in love and war, right? I think each side is claiming that they are doing some things that are fair in their own eyes. Iran, absolutely, could lash out and target these facilities to prove a point, especially if it feels even more cornered than it is today. But also, obviously, Saudi crude exports, Saudi exports in general, you know, they're at risk not only because of those strikes, but also potentially, we heard of the last few days of the Houthis and Yemen are potentially gearing up to join this war.

Now, you know, we have seen them target Israel in the last couple of days, or so far, at least, in terms of what the Houthis are saying, what they are doing and who they are targeting is purely Israel. They have come out to suggest that they will not be targeting, you know, American interests in the way that the Iranians have or anybody else. So, as long as things stay largely along those lines, again, I think we're in a safe-ish space. I say that, obviously, with the context of where we are at the moment. But should things change on that front, again, we could have another major problem on our hands.

Tom: I mean, that would be fairly catastrophic, I mean, obviously, for the global oil market, and by extension, for the global economy. And it would force even greater production shut-ins than we have already seen. Bachar, what kind of production shut-ins are we talking about now? I mean, how much crude is not being produced?

Bachar: Before jumping into that, I'd like to just touch on the Houthis issue. Clearly, there's a risk in the Red Sea, and the Houthis have managed over the past two years to run enough experiments to be able to disrupt trade flows from within the Red Sea. And so, they have a proven and tried and tested mechanism to try and disrupt those flows. But also, the situation has changed for the Houthis over the past two years. They've come up against the United States. At one point, there was a brief military operation by President Trump. And then also, the Israelis have expanded their bombings to include Houthis health territory within Yemen.

But then also, as we know, Yemen is divided and remains to be divided, but the Saudis now are actually on the east side of Yemen in addition to being on the northern side of Yemen. So, anyway. And we know that there is back channel communication between the Saudis and the Houthis. So, I'm not suggesting that the Houthis might not act depending on the developments in the region. I'm just suggesting that the current circumstances are quite different than the past two years, and the Houthis calculations could also be different. And the case in point would be them taking almost a month to join the fight in general. Moving on...

Tom: So, they're not the cohesive sort of force that we saw when they shut the Bab al-Mandeb Strait in 2023, that is now a far more fragmented picture in Yemen and far harder for them to come down on one side or other of this conflict.

Bachar: Exactly. And they've been on the receiving end of multiple bombing campaigns by the United States and by Israel over the past two years. And at the end of the day, they would be interested in holding territory within Yemen. But this could be at risk in case they try and attack Saudi Arabia because the southern part of Yemen is now fully dominated by Saudi Arabia and the armed groups in the southern part of Yemen are supported by the Saudis. So, this is why I'm saying the Houthis are kind of engulfed from the east and from the south by the Saudis as well.

Tom: That's really interesting. And I mean, it occurred to me when you were talking earlier, Nader, about the idea that the U.S. is now being kind of dragged into another of those forever wars, possibly, that Donald Trump campaigned on extricating the United States from. And of course, there are echoes here of what happened with Russia's invasion of Ukraine. That was supposed to be a lightning strike that's now in its fifth year. We have, of course, got peace talks going on in Pakistan. Are those being conducted in good faith, or at least, better faith than the initial talks involving Oman, which were interrupted, of course, by U.S. strikes in Iran? And what actual peace process progress has been made?

Nader: Okay, well, the talks that we're seeing at the moment, I think, are drastically different to what we were seeing before this war broke out in that right now, the diplomatic process is not that transparent. So, what we were seeing before this conflict broke out was very clear. You could see the American negotiators meeting at the same venue, at least, with the Iranian negotiators. You were hearing from both sides. There was dialogue, whether it was genuine attempted diplomacy on both sides, that's a conversation in front of the time. But at least, we could see that happening.

Right now, the diplomatic track is oddly, we're in a position where we have the U.S. or at least President Trump and his administration suggesting that there's ongoing talks. On the other side, we have the Iranians pretty much dismissing this outright. The only thing the Iranians are formally saying is that, you know, there are "friendly" countries that are engaging with us who are trying to improve or, you know, bring this war to an end. But that's pretty much as far as they're going.

Now, so this is the thing, what we're seeing with our own eyes is several countries, so that's Pakistan, Saudi Arabia, Egypt, and Turkey, who have now met, I believe, twice to this point to try and, you know, figure out essentially a way to break the stalemate or deadlock that we find ourselves in at the moment. But Iran and the U.S. are not necessarily involved in that. And really, when it comes to what Trump has been saying in terms of every day, he'll come out and say, "We've had very good talks and fantastic talks with these unnamed Iranians," that he says, "we don't want to name them because they could be killed internally by those inside and outside." You know, it puts us in a position where everyone's trying to read the tea leaves.

And obviously, it feels to me, at least, given the winds that Trump is trying to sort of show as the result of these talks being these vessels that Bachar mentioned that have come through the Strait of last few days, essentially, is this diplomatic process, the Americans, basically, talking to the these four countries to say, "How are things going?" Rather than actually having any kind of direct negotiations there. So, Trump is pointing to these, you know, small wins that he's getting in terms of getting these vessels out. Sure. But does this necessarily mean that we're going to get somewhere when it comes to solving this much bigger crisis, the war itself? I mean, that really remains to be seen at this point.

Tom: Yeah, I mean, the oil markets themselves, even the futures markets, and people have complained that the futures markets aren't properly reflecting the shortage of physical oil, even the futures market, I see ice prints back above $116 today. And I realized, Bachar, we moved on when we were talking about Yemen, we didn't actually discuss what's happened to production? I mean, how much has been cut?

Bachar: So, roughly between 10 million and 11 million barrels per day, Tom, we've lost from production in this part of the world, and from the countries that use the Strait of Hormuz as an outlet to...

Tom: Is that about a third of pre-war output?

Bachar: Yeah.

Tom: My word, yeah.

Bachar: And obviously, to varying degrees, all the countries have been hit. But the country that will bear the brunt of this shutdown of Hormuz is Iraq, ironically. Because out of all the countries that are affected in the region, Iraq technically has the best political relationships with Iran, but still they failed to leverage that into allowing them perhaps to use the Strait of Hormuz during this conflict. So, in Iraq, we're looking at, for example, a reduction in about 3.2 million barrels per day from around... So, yeah, Iraq is currently producing around 1 million barrels per day, give and take, from around 4.2 previously before the war. Kuwait's reduction is around 1.7 million barrels per day. Qatar production from oil is technically down to 100,000 barrels per day, mainly for its refineries. The UAE is producing at around 40%. So, they've reduced by 1.7 million, 1.8 million barrels per day. The Bahrain is completely shut down their production. And the Saudis have reduced production, mostly on the Eastern side. In the Eastern provinces, most of the, or all of the offshore fields have been shut down and the reduction is at around 2.5 million barrels per day.

So, in total, and if we are to include the reduction in production in Iran, because Iran is also not exporting at maximum capacity as it was prior to the war, we are looking at around 10.3, 10.4. Obviously, the number can go up a bit or go down a bit depending on different situations. But, yeah, we're looking now at this figure in terms of reduction, and that's being able to replace those barrels. Because we're now entering week five of disruption to supply, to exports, and what have you. Being able to bring back those barrels is going to be very difficult to markets. If things end in a certain way, if a political agreement is reached, I think OPEC+ will be looking at trying to speed up the process of bringing those battles back. But from history, from everything going on, OPEC+ will demand something from Trump in return because Trump is...

Tom: And indeed, well, I mean, what is OPEC+ without the Middle East? And of course, we have Russian ports being shut, which Ust-Luga enforced measures today. So, you know, not much scope for OPEC+ to boost supply, even if they did it, can't get out of the Strait. So, I just want to wrap up now. I mean, we've covered all the ground. If peace were suddenly declared, unlikely as that presently seems, how long would it take until we get back to normal pre-war oil flows? I mean, a month, two months, six months? I mean, what kind of timeframe are we looking at?

Nader: So, I mean, look, over the last few weeks, we've had some of the, you know, those foremost authorities on the planet, on the industry, you know, talking about this issue. I think the headline here is it's going to take time. Obviously, the longer that this conflict itself drags, the longer it's going to take us to get back to what we would consider a normal state. Because we're not only talking about a return to production in terms of those fields that were actually, you know, properly taken offline, but we're talking about having to repair facilities across the region, which again, could take many, many months, if not more. Supply chains themselves will need time to resettle. I mean, you know, the fact that we have vessels in parts of the world where they simply shouldn't be. So, I think at best, we're talking many, many months, but at worst, as Qatar Energy's own CEO said several weeks ago after some of the LNG facilities at Rastafann were hit, I mean, we could be looking at years. I know that's gas, but still, I think it's a very valid comment at this point in time.

Tom: Bachar, anything to add on that?

Bachar: Qatar is a significant case in this conflict, because apparently, the hit to Rastafann resulted in considerable damage. So, I understand the estimates that the minister and Qatar Energy's CEO gave caused ripple effects in markets and got people really worried. I've asked around our market sources. Some say it could take a bit less than that, but, yeah, we're looking at a year or two for Qatar to bring back the lost amount from its LNG production and exports. As for other countries, it's going to depend on the size of damage. Refineries have taken major hits in this part of the world. So, this is what I'll be looking at in terms of perhaps products, exports, and what have you. Shutting down the oil fields and restarting them will take mainly two to four weeks at best. But, yeah, refineries is what we need to keep an eye on.

Tom: Well, guys, that feels like a suitably somber note on which to end. Thank you very much. Here's hoping for peace and a restoration of normalcy, I think. Thank you, again, to my guests, Nader Itayim and Bachar Halabi. And please tune again soon for our next update.