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When you think of geopolitical risks to oil prices the first thought is the Strait of Hormuz and rising tension between the US and Iran. However the Straight of Malacca is the second major chokepoint risk in terms of volumes.

Straight of MalaccaThe Straight of Malacca traffic jams are a boon for pirates

The changing matrix of world energy supply and demand with the US now exporting oil at record volumes and Australia about to overtake Qatar as the number one exporter of LNG the. risk of the world’s most critical chokepoints has pushed up the Straight of Malacca to the fore. Nearly two-thirds of the world’s oil trade travels via maritime routes.

The Strait of Malacca is the second most important chokepoint in terms of oil volumes. The Strait of Malacca is between Indonesia and Malaysia and saw 16 mb/d of oil in 2016.

The Strait is the link between the Indian and Pacific Oceans and is the main route for oil from the Middle East to the Asian markets. The obvious choke point is the Strait is only 1.7 miles wide at its narrowest point. The EIA has said this is  “creating a natural bottleneck with the potential for collisions, grounding, or oil spills.”

Straight of Malacca Map

China and India, two of the largest oil importers in the world havea strategic interest in seeing uninterrupted tanker traffic through the Strait as do the two countries main suppliers. In 2018 with the US backing out of the Iran nuclear deal this becomes even more significant. For Iran keen to export to China in particular they are keenly aware of how easy Iranian vessels could be blocked. What if US Navy beagb patrols of the the area given its strategic importance? The existance of pirates is also a threat to shipping.

Oil markets are routinely subjected market rumor and one that rears it's head (usually when the managed money market is very long) is Iranian news, These often come in thin market times where news algorithms do the most damage. Will the Strait of Malacca become a major concern?

This can give opportunity (or pain) to hedgers and speculators. The key is to understand the true risk, the over extension or whether it is the beginning of something significant.

In this series on chokepoints we look at the four major pressure paths either side of the Arabian Peninsula. The other three choke points are:

  1. The Bab al-Mandeb Strait
  2. The Straight of Hormuz
  3. The Suez Canal and SUMED Pipeline.

From The Traders Community Research Desk

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