(WCTW) The Importance Of Fujairah And Why It Is An Inevitable Escalation Point For The Global Oil Market
Ship-to-ship transfers, I am sure you have read something along those lines by now. Fujairah, UAE’s bypass hub for the Strait of Hormuz, has been responsible for these S2S (ship-to-ship) transfers, which have accounted for ~4 to ~5 million b/d of crude outflows.
Why is this important?
Pre-conflict, the Strait of Hormuz saw oil flows of ~20 million b/d.
Post-conflict, there are two bypasses:
Saudi’s east-to-west pipeline: 7 million b/d, but only ~4 million b/d of crude export capacity in Yanbu.
UAE’s Abu Dhabi pipeline: 1.8 million b/d.
At the start of the war, we saw both Saudi and the UAE quickly switch to bypass routes to circumvent the Strait of Hormuz.
This was best reflected in the Saudi and UAE crude export figures.
Saudi
UAE
Now what you will notice is something starkly different in the charts above. Unlike the Saudis, which are still experiencing constrained export activities, UAE saw a massive surge in crude exports in June and the July export figures remain elevated.
In addition, both Kuwait and Iraq crude exports did not return to zero in July despite renewed conflicts in the Strait.
Kuwait
Iraq
Why is that?
Because of the S2S through the Oman lane and Fujairah.
How much (in million b/d)?
Kuwait - 1
Iraq - 1.5
UAE - 1.2
Saudi - 0.5
Total: 4.2 million b/d
This lines up with the rough estimates from Kpler, Vortexa, and others who have tracked the data.
What’s the significance of this?
The Iran war is an all-or-nothing conflict because Iran’s very survival is dependent on the outcome of this war. From an escalation standpoint, the Strait of Hormuz issue is all-or-nothing. If Iran agrees to any temporary deal without permanent guarantees, then all that would happen is for the US to resume the war at a later date when 1) ammunition is stocked up again, 2) air defense is stocked again, and 3) global oil inventory buffers build.
Using this logic, even complete control of the Strait of Hormuz is not a guarantee durable enough to withstand the test of time. Iran knows that it needs to use the Strait of Hormuz as a leverage chokepoint on the rest of the world if it is to deter future attacks and to gain power in the Middle East.
This means that the only way for a durable long-term solution is for the US to pull out completely from the Middle East. Without a total capitulation where the US exits the region, Iran will have to keep using the chokepoints (Bab al-Mandeb, Strait of Hormuz, and finally Fujairah) to inflict economic pain to bend the US to its will.
Now that Iran has already played the Bab al-Mandeb card, it will have to play its final card: Fujairah.