US blockade halts Iran's Hormuz crude exports for seven weeks

The US naval blockade has cut Iran's crude exports through the Strait of Hormuz to near zero for seven weeks, succeeding where years of sanctions failed and tightening supply through the world's most critical energy chokepoint.

"Even at the height of maximum-pressure sanctions in 2019-20, some Iranian crude cleared Hormuz every single month; at no point did outbound flows fall to near-zero for a sustained stretch as they have since mid-July," said Claire Jungman, analyst at Vortexa.

Iran loaded about 220,000 to 255,000 barrels per day of crude and condensate in August, down from roughly 740,000 bpd in July and about 2 million bpd in March, according to Vortexa and Kpler estimates. No Iranian crude cargoes have transited the strait to China, Tehran's only major remaining oil customer, since Washington reinstated the blockade on July 14.

The collapse is draining one of Tehran's main sources of foreign-currency earnings and could force it to finance spending by printing money, risking even higher inflation in an economy the International Monetary Fund estimates is running at nearly 70 percent this year, the world's third-highest after Venezuela and Sudan.

The blockade sits between the Gulf of Oman and the Arabian Sea, where US Navy vessels vet ships departing from and approaching Iranian ports. It does not extend along Iran's entire coastline, leaving dozens of Iran-linked shadow-fleet tankers active beyond the zone — 51 vessels operating in the Gulf of Oman and another 81 making deliveries in Asia or waiting off Malaysia, according to David Tannenbaum of Blackstone Compliance Services.

Iran currently has 29 tankers inside the strait carrying 36.11 million barrels of crude, said Samir Madani, co-founder of TankerTrackers.com. Iranian crude in floating storage west of the blockade line rose to 41.7 million barrels by Aug. 26 from 35.5 million at the end of July, while total Iranian crude afloat fell to 107 million barrels from 135 million, according to Vortexa data.

China's shrinking cushion

Iranian crude remains openly available, with cargoes for September and October delivery to China being offered, traders said. But available volumes are lower than for July and August because floating storage outside the Gulf is shrinking as no fresh supply arrives. "China can grab whatever's floating around in their neck of the woods, but that's about it for now, really," Madani said. Once sold, empty tankers cannot return to Iranian ports because of the blockade, leaving vessels idle offshore. Vortexa's Jungman said 27 sanctioned tankers linked to Iran's oil trade are currently waiting off Sri Lanka in ballast, unable to return.

Tehran's finances under strain

The export collapse comes after Iran transferred $7.5 billion in oil revenues from the first four months of its current year to the central bank — enough to cover government foreign-currency expenditures from July through December, according to the Oil Ministry via Anadolu Agency. Oil revenues generated between March 21 and July 22 reached 99 percent of the amount projected in the budget for that period.

The blockade's success marks a departure from previous sanctions campaigns, when Iranian crude continued reaching buyers despite restrictions. Even at the peak of maximum-pressure sanctions in 2019-20, some crude cleared Hormuz every month. The current halt, by contrast, has cut off fresh supply to China and left Tehran unable to replenish floating storage in Asia.

Kpler analyst Homayoun Falakshahi said the collapse could force Tehran to finance spending by printing money, risking even higher inflation. The blockade is part of a six-month US-Iran conflict that began Feb. 28; a 60-day memorandum of understanding signed June 18 suspended the blockade, but Washington reimposed it July 14 after the negotiation period expired Aug. 18.

Last week, Washington sought to increase pressure by threatening countries that continue trading with Tehran, while stopping short of immediately imposing penalties. The tightening of supply through Hormuz — through which roughly a fifth of global oil passes — pressures crude prices higher, though the extent depends on how long the blockade holds and whether other producers step in to fill the gap.

This article is for informational purposes only and does not constitute investment advice.