Potential Closure of the Strait of Hormuz Could Raise Brazil’s LNG and Fuel Import Costs

A potential closure of the Strait of Hormuz, located between Iran and Oman, due to escalating conflict involving Iran, Israel, and the United States in the Middle East could increase Brazil’s import costs for liquefied natural gas (LNG) used to supply thermoelectric plants in the short term, as well as gasoline and diesel in the medium term, said Roberto Ardenghy, president of the Brazilian Institute of Petroleum and Gas (IBP).

Although the closure has not yet occurred, it was approved by the Iranian parliament on Sunday (22). Ardenghy emphasized that part of Brazil’s imports of these fuels pass through the Strait. According to him, just as critical as the closure itself is how long such an interruption would last should it take place.

Regarding LNG, he explained that Brazil imports between 10% and 14% of its supply, on average, for local consumption. “There are currently seven gas liquefaction units distributed across the country, specifically designed to meet the demand for imported gas liquefaction,” he noted.

The concern, he pointed out, is that this possible closure comes at a time when reservoir levels at hydropower plants are seasonally low, resulting in reduced energy generation. This is when LNG imports usually rise to meet the increased demand from thermoelectric plants. Thermoelectric generation typically becomes more active mid-year to offset the reduced output from hydroelectric sources.

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The Middle East’s largest LNG suppliers include Qatar, Kuwait, and Oman. If the Strait is closed, importing from these countries would become virtually impossible, and Brazil would need to seek alternative suppliers. “Trinidad and Tobago, Algeria, the United States itself. Russia also exports some natural gas,” he listed as an alternative global LNG supplier.

“But we won’t be the only ones looking for new sources. Other LNG-importing countries will do the same,” he added.

In other words, with fewer LNG suppliers available on the global market due to a possible Strait closure (and therefore the inability to import from countries that depend on it for exports), global supply would shrink. Yet demand would remain unchanged. This imbalance could lead to a short-term price increase for imported LNG.

Additionally, if the Strait of Hormuz is closed for an extended period, prices for other petroleum derivatives could also be affected, he acknowledged.

Looking at the medium-term consequences for Brazil’s energy sector, Ardenghy mentioned other imported products. Besides LNG, Brazil also imports diesel and gasoline, with Middle Eastern countries among the suppliers. A possible Strait closure would impact their petroleum product exports, he reiterated.

Typically, this time of year, Brazil imports between 5% and 10% of its internal market demand for diesel and gasoline, which is relatively small, he admitted. Domestic stockpiles of these two fuels could provide a temporary buffer against a disruption in supply from the Middle East.

However, from October onward, the scenario changes. Brazil starts importing around 25% and 18% of its total domestic consumption of diesel and gasoline, respectively. This is driven by seasonal increases in consumption — diesel due to agribusiness activity and gasoline due to more travel by Brazilians.

“The real issue is if this [Strait of Hormuz closure] lasts,” he admitted.

He stressed the strategic importance of the Strait, not only for oil and fuel trade but also for global commerce. “It’s a grave matter [the potential closure]. Because a lot of product flows through there. Approximately 20 million barrels of oil and an additional four to five million barrels of derivatives pass through daily. On the other side, the Gulf of Aden, connecting the Red Sea to the Arabian Sea and then to the Indian Ocean, also carries 15% of all globally traded goods,” he explained.

“So, for example, manufactured products from China or Vietnam use that route to reach Europe, Canada, and even parts of the U.S. market,” he said. “Thus, [the Strait’s closure] affects not only oil but also global supply chains.”

Given all these factors, the IBP president anticipates a new surge in the price of Brent crude on Monday (23). He noted that in just nine days of the Middle Eastern conflict, the cost per barrel rose by about $10.

On the previous Friday (20), Brent crude, the global benchmark for August delivery, closed at $77.01 per barrel on the Intercontinental Exchange (ICE). Meanwhile, WTI, the U.S. benchmark for July delivery, closed at $74.93 per barrel on the New York Mercantile Exchange (Nymex).

Source: Valor Econômico

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