How Might the Closure of the Strait of Hormuz Affect the Forex Markets?

The Strait of Hormuz is of course a vital oil-transport waterway between the Persian Gulf and Gulf of Oman, crucial for the export of crude oil from countries such as Qatar and UAE. Recent tension between the West and Iran over Iran's nuclear enrichment program have seen the Deputy Head of Iran’s influential committee, Mohammad Ismail Kowsari state this week that the strait  “would definitely be closed if the sale of Iranian oil is violated in any way.”

What will be the impact on the forex markets should the Strait of Hormuz be closed?
 
EU foreign policy chief Catherine Ashton announced this week that Iran had its assets in the Central Bank frozen and disallowed new contracts for crude oil and petroleum. As approximately 80% of Iran’s foreign revenue is estimated to come from oil exports, this disruption could cripple the country.
 
The importance of Hormuz is not to be underestimated as some 17 million barrels of oil pass through every day and if it was closed, roughly 20% of worldwide oil would be affected, creating an inevitable spike in the price
 
A broad embargo on Iranian oil, which would in effect take 1.5 million barrels a day off the global market without another producer being able to compensate for it, would risk pushing the market price up between 20-30%, which is roughly a $20-30 per barrel increase, whereas a Strait of Hormuz closure could trigger an even larger spike than that.
 
Saudi Arabia has increased production to try and compensate for the potential loss but the IMF has warned that the Saudi buffer is also at risk with a Hormuz closure.
 
On 30th January, coastguards and naval forces of the Gulf Co-operation Council (GCC) announced contingency plans should the Strait of Hormuz be closed. GCC members Saudi Arabia, Bahrain, the United Arab Emirates (UAE), Qatar and Kuwait rely on Hormuz not just for oil and gas exports but for the imports of food.
 
"Exporting oil or importing goods and cargo through Hormuz is a main concern for the GCC," Commander Mubarak Ali Al-Sabah chief of maritime operations at Kuwait's Coast Guard told Reuters.
 
"The GCC has a plan as a body - not just Kuwait separately or Bahrain or Saudi Arabia - we have a plan we just hope that everything stays safe," Al-Sabah said, without giving details of the plans.
 
Any contingency plan which ensures the safety of oil exports would also affect the forex markets. The stability of the Qatari and Saudi riyal, Omani rial would be subject to some short-term turmoil as plans commenced but this would die down. Investors are no doubt considering whether they should perhaps hedge their exposure to these currencies.
 
One of the biggest casualties of any action taken by Iran would be the Iranian rial. The currency has come under increasing pressure against the US dollar in recent months, sliding 12% in early January when the US threatened to take sanctions against any foreign firms or organizations which dealt with the Iranian Central Bank. Any attempt by Iran to close the Strait of Hormuz would lead to further falls, and possibly civil unrest. Iranians have seen their wages fall by 50% since December 2010 thanks to the currency falls.
 
The Saudi and Qatari economies are heavily dependent on crude oil and natural gas exports. Qatar supplies the UK with over half its LNG (liquid natural gas) supply. Centrica, the parent company of British Gas, signed a three-year deal with Qatar for LNG supply in February 2011. If the Strait of Hormuz is closed, analysts expect the price of crude oil to rocket by as much as 50% per barrel. The reduced demand for Qatari and Saudi crude, coupled with massive shortfalls in exports of gas, would lead to heavy falls in the Saudi and Qatari currencies.
 
Oman, like the Qatar economy, is heavily dependent on crude oil and natural gas exports. It produces 816,000 barrels of crude a day and over 24 billion cubic meters of natural gas a year. Any closure would lead to a depreciation of the Omani rial.
 
Soaring oil prices would lead to increased inflation in western countries, which, in turn, could lead to a number of currencies depreciating in value. We might also see reductions in global trade as a result and economies plunged back into recession as the buying power of major currencies such as the US dollar and Euro are weakened. Financial Oil Analysts have a wide range of views as to where the oil price will go in 2012 with an anticipated range taking into account the mix of bullish and also bearish views and coming out at somewhere between $85 and $120 with plenty of upside risk and volatility along the way.

Disclaimer: Elizabeth Goldman is a freelance finance writer contributing this article on behalf of Sunbird FX - brokers and providers of forex trading platforms such as MetaTrader 4. The thoughts and opinions expressed in this article are of Elizabeth Goldman alone and not of Sunbird FX or any other party.