Energy trade flows are rerouted as the Strait of Hormuz remains mostly closed

“No country has ever profited from protracted warfare,” the great Chinese military theorist known as Sun Tzu wrote around the 5th century BCE. It is a warning that may resonate in Washington today.

By today’s standards, the latest conflict in the Middle East has not been going on for a particularly long time. It began only 10 weeks ago. But it has already outlasted President Donald Trump’s suggestion in the early days of the campaign that it was intended to take four to five weeks.

The ceasefire that was agreed on 8 April has officially continued, although punctuated by sporadic attacks on shipping and land installations from both sides. But no lasting peace deal has been reached, and over the weekend hopes for such a deal appeared to recede.

The US last week sent Iran a proposal for a peace agreement that would reopen the Strait of Hormuz. Other key items in the plan covered issues such as uranium enrichment, sanctions on Iran’s trade and financial flows, and releasing frozen Iranian assets held at international banks.

On Sunday, Iran submitted its response, refusing to accept some of the key conditions sought by the US. President Trump described the response as “totally unacceptable”, without giving any details about the specific points of difference between the two sides.

Iranian sources said their response, submitted through Pakistani mediators, included an end to hostilities around the region, lifting sanctions, a deal over the country’s nuclear programme, and reopening the Strait of Hormuz.

Traffic through the strait has been subject to a dual blockade, with the US Navy stopping vessels moving to or from Iranian ports, and most other shipping deterred from attempting a transit by the threat of attacks.

In a social media post on Sunday afternoon, President Trump appeared to hint at resuming US strikes on Iran. He wrote that the country had been laughing at the US, but “they will be laughing no longer!”

Israel’s prime minister, Benjamin Netanyahu, said on CBS television over the weekend that although the war on Iran had accomplished a great deal, it was not over. He highlighted Iran’s nuclear facilities and enriched uranium, its support for proxy groups in the region, and its ballistic missile programme, as issues that still needed to be resolved. “All of that is still there, and there’s work to be done,” he said.

The possibility of continued conflict and a return to sustained attacks by both sides raises the prospect that the Strait of Hormuz could remain largely closed for some time. After the ceasefire was agreed last month, the number of ships transiting the strait picked up to a maximum of about 25 a day, according to Wood Mackenzie’s VesselTracker service. Recently, it has dropped back to about 10 per day. In peacetime, about 150 to 170 vessels made the transit each day.

While exports through the strait remain disrupted, the world is running down its stocks of oil. In the week to 1 May, the run-down in US stocks slowed from the dramatic pace reported the previous week.

However, US exports remain very strong. Net exports for the week averaged 5.76 million barrels per day of crude and products, according to the Energy Information Administration. That is the third-highest number on record.

Tightening markets continue to put upward pressure on fuel costs for US consumers. The average retail price of gasoline remained at about US$4.52 per gallon on Monday, while diesel was about US$5.64 per gallon, according to the Automobile Association of America (AAA).

That diesel price is just 3% below the all-time high of about US$5.82 a gallon in the AAA series.

Chris Wright, the US energy secretary, said on Sunday he was open to the idea of a temporary suspension of the federal gasoline tax, to ease the impact of fuel prices on consumers.

Crude oil prices have been on the rise again, after falling last week. Brent crude futures for July, which briefly dipped below US$97 a barrel last week, rose to US$105 a barrel in early trading on Monday morning.

On Sunday Narendra Modi, India’s prime minister, urged people to return to some of the practices seen during the Covid-19 pandemic, including teleconferencing and remote working, to save fuel. “Today, the demands of the times are such that if we restart these systems, it will be in the national interest,” he said.

Other countries, including Thailand and Vietnam, have already taken similar measures.

Faced by the looming risk of sustained disruption to energy exports from the Gulf, others around the world are assessing what they might need to bring oil demand into balance with supply. To the extent that the gap is not closed by policy actions, prices will have to rise to do it through market forces.

Two CEOs of oil and gas Majors have warned recently about the mounting impact from the closure of the strait.

Mike Wirth, CEO of Chevron, talked about how the shock absorbers in the oil market were being drained away.

“There's been significant supply taken out of the system, and we are facing this upward pressure on prices and volatility that is likely to continue,” he said.

Wael Sawan, CEO of Shell, said on the company’s first quarter earnings call: “We have dug ourselves a hole of close to a billion barrels of crude shortage at the moment, either because of locked-in barrels or unproduced barrels… And, of course, that hole is deepening every single day, so the journey back will be a long one.”

This week, President Trump will visit China, which is the world’s largest oil importer and an ally of Iran. The talks between President Trump and President Xi Jinping of China will be closely watched, in the hopes that they can find a solution that ends the war and allows the free flow of exports from the Gulf to resume.

The Wood Mackenzie view

The ultimate impact of the Middle East conflict on energy and natural resources is highly uncertain. It will depend both on how long the war lasts and how it ends.

The Gulf region holds vast reserves of oil and gas that can be produced at relatively low cost, and which are critical to the functioning of the global economy. That creates a strong incentive to restore energy export flows from the region, one way or another.

However, signs are already emerging that governments and companies are manoeuvring for a world in which Gulf exports will be disrupted for the long term. There has been a surge in interest in how to reduce countries’ reliance on imports from the Gulf, whether by finding alternative sources of hydrocarbons or by reducing total consumption of oil and gas.

Wood Mackenzie data show how international trade flows are already being reconfigured to reflect these new pressures.

Of the alternatives to hydrocarbon exports through the Strait of Hormuz, by far the most important has been Saudi Arabia’s East-West pipeline, which carries crude across the country to the terminal at Yanbu on the Red Sea.

The flow on that pipeline has been increased to 7 million b/d. Wood Mackenzie analysis suggests that before the war, oil exports from the Yanbu terminal were running at about 735,000 b/d. By the first week of May, that number was averaging about 4 million b/d.

As Amin Nasser, Saudi Aramco’s CEO, put it when reporting the company’s first quarter earnings on Sunday, the pipeline “has proven itself to be a critical supply artery, helping to mitigate the impact of a global energy shock”.

As countries look to reduce their oil and gas consumption, many technological options, such as wider adoption of electric vehicles, need time to have a material impact. One option that can make a relatively rapid difference is shifting away from gas and towards coal for power generation.

Countries in Asia and Europe , including Japan, South Korea, Italy and Germany, have been considering or have already enacted policy changes to delay retirements of coal-fired plants and boost coal generation..

Wood Mackenzie analysts have identified Australia and Indonesia as the principal beneficiaries of stronger markets for thermal coal. Producers in South Africa, the US, Colombia and possibly Russia are also likely to see a boost.

This is not a coal renaissance, says Anthony Knutson, Wood Mackenzie’s global head of thermal coal markets. If a peace agreement can be reached soon, and the Strait of Hormuz reopens quickly, we would expect world markets and prices to return to pre-war levels by next year.

What the crisis has done, however, is slow coal’s decline, strengthening demand through the 2020s, even though it has not reversed the long-term trend towards lower-carbon energy. Coal trade volumes are likely to stay near 1 billion tonnes per year through the rest of the 2020s.

If the closure of the strait lasts longer, and forces a more fundamental rethink of energy security, then there could be even more upside for coal demand.

In brief

Shell was the last of the largest Western oil and gas Majors to report earnings for the first quarter of 2026. Like others in its peer group, it saw a healthy increase in underlying profits. Adjusted earnings for the quarter were US$6.9 billion, well ahead of consensus estimates, helped by higher prices for crude and refined products. Shell’s trading business was also well-placed to take advantage of market turbulence and price volatility.

The Financial Times estimated that the trading arms of the three largest European oil and gas companies – Shell, TotalEnergies and BP – had between them earned between US$3.3 billion and US$4.75 billion extra from their trading operations in the first quarter.

Data centres in space may seem like a technological leap too far, at least for now, but how about data centres at sea? Panthalassa, a wave power company founded a decade ago, has just raised US$140 million to support the development of 85-metre-long floating data centres. The vessels, each longer than an Airbus A340, are intended to help meet the AI industry’s soaring demand for computer power.

The company argues that offshore data centres could avoid many of the mounting challenges facing onshore facilities, including limited grid capacity, water scarcity, permitting delays and local resistance. Panthalassa aims to have its first pilot units in service this year, with full commercial operations starting next year. If you are intrigued by the concept, you can watch this video to find out more.

Other views

Nigeria’s oil and gas independents come of age – Simon Flowers and Gavin Thompson

Energy security shocks and coal’s role in a fragmented world – Julian Kettle, Anthony Knutson, Alex Griffiths and Gavin Thompson

How US shale and deepwater are reshaping Major upstream competitiveness – Ryan Duman, Miles Sasser and Matt Woodson

Southeast Asia’s new wave of deepwater gas projects

Decarbonising data centres: hyperscalers’ power race will increase emissions but spur more direct decarbonisation – Peter Findlay

A $6.5B geothermal company? Industry eyes tipping point – Christa Marshall

Democrats don’t have to campaign on climate change any more – Matthew Huber

Quote of the week

“In the past, when we had major energy crises like the oil crisis in the 1970s, or four years ago after Russia’s invasion of Ukraine, the natural gas crisis in Europe, there were major policy responses. It will be the same this time. Countries in the next few years will renew their energy strategies: which fuels, which technologies and which energy partners. And this time, when countries choose their energy partners, the most important criterion will be trust. And today, Canada is one of those countries that enjoys trust across the world. And this may be your most important commodity to sell.”

Fatih Birol, executive director of the International Energy Agency, argued that given continued demand for oil and gas, Canada would play a key role as an energy supplier to the world.

He added that it was important for Canada to build new oil and gas export infrastructure quickly, because key importing countries would be making critical decisions about suppliers in the next three to four years.

Chart of the week

This is another chart from our recent report on what we are calling “global shale 2.0”. The report, titled ‘A hydrocarbon copy: the upstream industry’s return to international shale exploration​’, looks at prospects for developing unconventional resources in the world beyond the US, and explains why the industry is increasingly interested in them.

The chart shows one of the key factors: exploration in the US Lower 48 states all but dried up after the horizontal Permian boom took off in the 2010s. Frontier drilling was already on a downward trend but petered out completely after 2014. The result is that there is no real possibility of another new US play on the scale of the Permian Basin emerging for the foreseeable future. Take a look at the full report for more details.

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