As the conflict between the United States, Israel and Iran continues, the fighting shows no sign of abating any time soon.
Iran has launched hundreds of missiles and drones towards several neighboring countries that host U.S. military bases in retaliation for U.S. and Israeli airstrikes on Iran.
In addition to keeping up strikes on Iran, Israeli forces have launched an air and ground offensive into parts of Lebanon in response to attacks from the Lebanon-based militant group Hezbollah.
Turkey, a member of the North Atlantic Treaty Organization (NATO), also confirmed that NATO air defense systems shot down an Iranian missile heading towards its airspace on March 4. More than 1,000 people in Iran and six U.S. service members have been killed in the conflict so far.
The war has severely disrupted the movement of goods and people in and out of the Middle East via air and ocean transport, with flights at many major regional airports impacted and shipping traffic through the Strait of Hormuz effectively halted.
Military strikes have also shut down a growing number of oil and gas facilities across the region, including production and storage sites in countries like Qatar, Iraq, Saudi Arabia and the United Arab Emirates.
Impacts have also started to spread to other parts of the world, particularly to countries in Asia, where disruptions to energy and raw material supply have forced several companies to declare force majeure on some of their products just days into the fighting.
With neither side seemingly willing to de-escalate the situation, logistics and production-related disruptions are likely to worsen in the coming weeks, not only in the Middle East, but in other parts of the world that depend on a steady energy supply from the region as well.
Vessel movement through the Strait of Hormuz remains suspended
Shipping traffic through the Strait of Hormuz, an important waterway located between the Persian Gulf and the Gulf of Oman, has effectively come to a halt amid the worsening security situation in the region. Iran’s Revolutionary Guards had reportedly warned ships as early as February 28 that vessels were no longer allowed to pass through the strait. On March 2, a senior member of the Revolutionary Guards reaffirmed the closure and threatened that Iranian forces would target any vessel trying to sail through it.
Amid growing insecurity, some of the world’s largest maritime insurance mutuals announced that they would withdraw war risk insurance coverage for vessels entering the Persian Gulf from March 5, which could discourage ship owners from sending vessels through the area. Insurance coverage remains available from other providers, but coverage costs have reportedly increased by 50% – 100% in some cases.
U.S. President Trump has since suggested that the U.S. would be willing to provide insurance guarantees and naval escorts for vessels sailing through the Strait of Hormuz to ensure the safe passage of commercial ships. The insurance guarantees would be provided through the U.S. International Development Finance Corporation, which has since released a statement saying that it would support commercial shipping charters, maritime insurance providers and shipowners. While these announcements might help to reassure the maritime industry, the implementation of the proposed measures would take time, and many details about the proposals remain unclear.
Thousands of vessels are said to remain stuck inside or around the Persian Gulf since the conflict broke out, with dozens of very-large crude carriers (VLCCs), which can transport around two million barrels of oil each, anchored in the area around the Strait of Hormuz.
Saudi Arabian Oil Company (Saudi Aramco), Saudi Arabia’s state-owned oil company and one of the world’s largest oil companies, is reportedly trying to reroute some of its crude shipments to the Red Sea but it remains unclear if facilities located at Yanbu Port can load vessels at the needed rate.
Meanwhile, the United Arab Emirates could use the Abu Dhabi Crude Oil Pipeline, which can transport 1.5 million barrels per day (bpd) from oil fields in Abu Dhabi to the Port of Fujairah on the Gulf of Oman, to bypass the Strait of Hormuz. However, areas in Fujairah have already come under attack, slowing down port activities and shutting down several oil storage facilities.
Despite these potential alternative export routes, a prolonged closure of the Strait of Hormuz could force some producing nations in the Middle East to reduce or suspend output in the coming weeks. Available land-based storage facilities could fill up, and with a limited number of empty vessels available in the Gulf region to export supply, producers might be forced to adjust output.
In Iraq, officials have already cut daily crude oil output by 1.5 million bpd and warned that the country may reduce output by more than 3 million bpd within the next couple of days due to lack of storage capacity and no way to export existing stocks.
The Strait of Hormuz is one of the world’s key energy export routes, with roughly a fifth of oil and gas supply moving through it. Refineries in the Gulf also produce diesel and naphtha, materials used as feedstock to make gasoline and plastics, and other petroleum products that would normally be exported through the strait.
In addition to the energy market, the waterway also serves as an important export route for other industries, handling around 15% of global aluminum exports, a third of global fertilizer trade, and a range of agricultural products.
Flight operations in and out of the Middle East remain curtailed
Flight cancellations continue to ripple across many major air transport hubs in the Middle East, with more than 23,000 flights in and out of the region cancelled since the conflict broke out on February 28. The cancellations as well as regional airspace closures have stranded thousands of passengers and have reportedly reduced air cargo capacity on some routes between Asia, the Middle East and Europe by almost 40%.
At the time of writing, a number of airspaces in the region remain fully or partially closed, including the airspaces of Iran, Iraq, Qatar, Bahrain, and Syria. Jordan started reopening its airspace on March 4, while Israel allowed a limited number of civilian repatriation flights to resume from March 5. Outgoing flights from Israeli airports are only expected to resume from March 8 at the earliest.
Military strikes target companies and industrial areas across the Middle East
The conflict between the U.S., Israel and Iran has not only disrupted the movement of vessels and planes in and out of the region, military strikes on companies and industrial areas have also impacted production activities in a growing number of countries. So far, production shutdowns have been confirmed in Israel, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates, with the regional oil and gas sector being by far the most impacted industry.
Notably, the situation is also starting to have knock on effects in other parts of the world, particularly in Asian countries, where a large amount of the energy-related shipments that move through the Strait of Hormuz are normally exported to.
Several companies in the energy and chemicals industries have been forced to reduce production or declare force majeure on some of their own products due to shipment disruptions caused by the conflict. Among the affected companies are PT Chandra Asri Pacific, which operates Indonesia’s largest integrated petrochemical complex, and Yeochun NNC Co., Ltd., one of the biggest petrochemical manufacturers in South Korea.
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