Force Majeure Unlikely Despite Strait Of Hormuz Shipping Disruption -- Analyst

By Siti Radziah Hamzah

KUALA LUMPUR, March 1 (Bernama) -- Gulf national oil companies are unlikely to declare force majeure pre-emptively amid elevated geopolitical risks in the Middle East, following the reported sea traffic disruptions in the Strait of Hormuz, said SPI Asset Management managing partner Stephen Innes today.

He added that such a move would typically require demonstrable inability to perform contractual obligations, and Gulf national oil companies would more likely manage nominations as well as adjust logistics first, stressing that disruptions in the Strait of Hormuz would not automatically trigger force majeure.

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Force majeure in the oil and gas industry is a contractual provision that relieves parties from performing obligations, such as supply or exploration, due to unforeseeable and uncontrollable events, including natural disasters, wars, pandemics, or government actions that make performance impossible.

It requires a specific clause, timely notice and strict compliance and does not extend to mere economic hardship or market downturns.

“It depends on contract terms and delivery structure. However, if export routes are materially impaired, even with upstream production intact, this constitutes a strong legal basis for a declaration.

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“In short, the market is currently pricing transit risk rather than confirmed production loss. If flows continue, volatility will moderate. If transit is disrupted, the repricing will be rapid and nonlinear because the strait represents systemic, not marginal, risk,” Innes told Bernama.

Oil tanker traffic through the Strait of Hormuz has slowed significantly following US and Israeli strikes on Iran, with news reports describing the key shipping lane as effectively closed.

Around a fifth of global oil and liquefied natural gas transits the strait each day, worth over US$1.3 billion (US$1 = RM3.89), including Iranian exports.

War risk premiums and higher freight rates constrain financial flows

Innes said that even if the Strait of Hormuz remained technically open, war-risk premiums, higher freight rates, and potential insurance withdrawals could effectively constrain flows.

“In previous episodes, insurance economics tightened before physical infrastructure was damaged. The industry is often as concerned about insurability and commercial viability as about direct physical risk,” he added.

Regarding exposure to Iranian crude disruption, Innes said China’s independent refiners were most directly exposed, as they absorb the majority of Iranian exports, often through indirect trading channels.

He said that a disruption would first tighten feedstock availability for that segment.

At the same time, he added that the broader Asian market would feel the impact through higher benchmark pricing rather than immediate physical shortages.

Pipelines versus sea transportation

Asked whether pipelines could offset a closure of the Strait of Hormuz, Innes said Saudi Arabia’s East-West pipeline and the United Arab Emirates’ Fujairah export route provide partial bypass capacity but can only offset a fraction of total strait volumes, which account for about 20 per cent of globally traded oil movements.

“They reduce the severity of a disruption but cannot eliminate the systemic impact if transit is materially impaired,” he said.

At the point of writing, Brent crude rose 2.87 per cent to US$72.87 per barrel.

-- BERNAMA