THE shipping industry is understandably nervous.

However many times armchair analysts point out that a full shutdown of the Strait of Hormuz is unlikely, when senior members of Iran’s National Security Committee are saying otherwise, it’s likely to make you think twice.

Given the speed at which this conflict is moving, the measured risk assessment for a ship fixed now could significantly deteriorate en route. This is a fluid situation and tankers famously take a while to turn round.

In the event that the relative market calm does implode, it will be Israeli and US-affiliated targets first in the firing line and a cascading risk profile underneath depending on how your perceived profile stands up against available targets.

While the situation is rapidly evolving, that calculus of risk plays into the decision making, with varying levels of concern among operators and insurers effectively keeping vessel availability in check. That in itself is keeping the market calmer for the moment, but there is another factor playing into that nervous balance, at least in the oil market.

Our friends at Vortexa track about 3.3bn barrels of crude oil in onshore storage tanks, and typically another 1.2bn at sea. That makes 4.5bn barrels of tracked oil, which can be easily expanded to 5.5bn barrels if underground strategic storage, untracked sites and oil in pipelines are added to the mix. This compared to an estimated 84m barrels per day of crude demand, explained the ever insightful chief economist David Wech.

In a completely theoretical scenario, if global production stopped entirely, this would be sufficient to cover demand for 65 days, with product stocks and other volumes in the supply chain probably topping this up to close to 100 days of global demand cover.

So when India’s oil minister goes on TV to explain that he is preparing to source crude oil from outside the Middle East and cut India’s own refined-product exports should the Strait of Hormuz be blocked to ship traffic, he’s simply preparing for the worst, not signalling a significant market crisis.

A full shutdown is, of course, unlikely. So let’s take a more realistic assumption of disruption that assumes that 1m barrels of crude is being lost persistently.

In such a situation, the storage coverage would last for more than 15 years, according to Wech at Vortexa.

Currently, the main threat to international shipping is collateral damage, but that will change immediately the moment the US and other countries become involved. And if the conflict escalates to a level where the Iranian regime is significantly threatened, then for the 10% of VLCCs, 5% of aframaxes/LR2s and 6% of suezmaxes that are inside the Middle East Gulf at any given time, this becomes less of a theoretical risk exercise and more of an immediate emergency situation.

So there is plenty of risk in the current scenarios ahead and much of it we should be worried about, but the prospect of the market running out of oil should probably stay reasonably low down the list of concerns.

Richard Meade
Editor-in-chief, Lloyd’s List 

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