THE SECURITY situation in the Strait of Hormuz is highly volatile and could end up being either very good or very bad for tanker shipping demand.

If transits remain risky but the strait remains open, and if threats create inefficiencies and cause some owners to steer clear, the current surge in spot rates could persist, if not intensify.

Spot rates in some asset classes have more than doubled week on week (w/w), with very large crude carriers, long range 2 product tankers and very large gas carriers being the main beneficiaries.

If Iran closes the strait, tanker demand and rates would theoretically fall after an initial spike, because too much of the world’s oil and natural gas would be shut in, that supply couldn’t be fully replaced, and there would be too many vessels chasing too few cargoes outside of the Middle East.

Around 15m barrels per day of crude oil and 2.5m bpd of products transit the Strait of Hormuz, as well as around 20% of the world’s liquefied natural gas and a third of global liquefied petroleum gas.

Tanker executives speaking at Marine Money Week in New York on Wednesday gave their perspectives on how the Strait of Hormuz threat could affect freight markets. They maintained that if the strait was ever closed, it would be quickly reopened — purely out of necessity.

“It is too big to fail,” affirmed John Boots, chief financial officer of LNG carrier owner Cool Co. “The world can’t afford for it to close.”

According to Lars Barstad, chief executive of crude tanker owner Frontline, “I seriously doubt the strait can be closed for a long period of time.”

“The world can’t live in a normal situation for very long without the volumes that come through,” said Lois Zabrocky, chief executive of crude and product tanker owner International Seaways.

“Anything can happen, because we’re in a really dangerous place in the world, but I think there are a lot of complex discussions going on behind the scenes that will keep the strait open,” she said.

“If you look at marine insurance today, premiums have not gone up yet,” said Svein Moxnes Harfjeld, chief executive of DHT, which owns VLCCs. “If the insurance market is anything to go by, the Red Sea is riskier than the Strait of Hormuz.”

Iran could theoretically disrupt traffic in the strait by using mines or conducting missile and drone attacks from shore.

There are already missiles flying over shipping routes, launched from Iran toward Israel, “but the [insurance] market seems to look at this missile activity as being contained to that, at least for now, whereas the activity in the Red Sea was very much ship-related, and it was very hard to defend ships or for navies to defend them,” said Harfjeld.

“I’m sure Iran has the ability to do so [target ships with missiles] if they want to, but at least for now, it has not been a risk,” said Harfjeld. “We decided not to go to the Red Sea very quickly. For now, we will still go to the Middle East, but of course, things can change.”

Mads Peter Zacho, chief executive of Navigator Gas, which specialises in handysize LPG carriers, said, “We are pretty active in transporting LPG through the Strait of Hormuz. We have not seen war risk premiums coming up, and ships have not been targeted. We’re monitoring this very, very closely, but so far, we continue trading in and out.”

New security measures that create trading inefficiencies could be enacted if threats to shipping become explicit. “Shipping could be exposed to delays,” said Barstad. “First would be daylight-only navigation. Then, you could potentially see convoys to keep ships safe.”

Harfjeld said, “It depends on what kind of risk the ships are exposed to. Convoys help if you have skiffs or other smaller vessels approaching that want to attack you. But if it’s aerial hostility you’re facing, a convoy doesn’t really help you much. It actually concentrates the assets that can be hit.”

Tanker collision not related to Israel-Iran conflict

There has already been one shipping casualty in the vicinity of the strait: the collision on Monday between Front Eagle (IMO: 9855343), a fully laden VLCC, and the unladen Adalynn (IMO: 9231767), a suezmax that appears to be part of the shadow fleet*.

However, this casualty was not driven by the Israel-Iran conflict, according to Frontline.

“What transpired on Monday is the nightmare of any shipowner sitting here,” said Barstad during a Marine Money Week panel. “We had a three-football-field-long tanker fully laden with crude oil sailing at 13.5m knots that all of a sudden ended up in a collision with a ship and we don’t know who owns that ship, who manages it, or who insures it.

“It’s customary in such a situation that you, as an owner, establish contact with the other owner, to try to manage the situation — not discussing who’s at fault, but just managing the situation to keep the seafarers safe and the environment protected. This was not possible in this instance, which shows you how crazy this market has become.

“We have been very vocal on how dangerous the situation is with the shadow fleet. We just had a very, very close call. We could have had 2m barrels of crude oil in a big sheen in the Middle East. It was a super-scary experience and luckily — incredibly, looking at some of the footage — all went well [for Frontline].

“I’m very happy to share that we have established via local agents that the other ship’s crew is safe in a hotel in Fujairah. But it’s insane that we are the ones who have to communicate this, and not the owner of that vessel,” said Barstad.

Owners expect shippers to seek supply alternatives

Vessels are not being targeted in the Strait of Hormuz, but freight markets have surged as the risk premium has increased.

Harfjeld said, “With the events in the Middle East, people are putting on a risk premium. There has not been more [VLCC] cargo or fewer ships yet. It’s still sort of a similar balance, but it tells you how tight the market is that the owners are actually able to pump up the rates by this amount. It’s a significant increase.”

Other shipping executives believe there is at least some upside effect from market participants looking for contingency supplies.

According to Mikkel Seidelin, chief commercial officer of Teekay Tankers, which owns midsize crude carriers, “I think that on the margin, just with the risk profile we have in the Middle East, buyers of Middle East crude are thinking: If this happens, where can I float some oil from elsewhere in the world? And most of that oil would have to come from further afield than it is today.”

Barstad said, “If I was a refiner in Asia, I would want to decide where I took the marginal barrel from, and it would probably be from the Atlantic Basin.

“It’s a bit early to see in the market, but I think that will probably be the playbook that transpires as we move forward. If you are an Asian refiner, you probably want a bit more inventory, and you would reach further out, and the tonne-mile effect is extremely powerful for a barrel coming from the US, Brazil, Guyana, West Africa or the North Sea.”

Harfjeld noted that Asian refinery procurement activities are much different today than they were during previous threats in the Strait of Hormuz, such as during the Iran-Iraq war in the 1980s and the Gulf Wars in the early 1990s and early 2000s.

“It’s now much broader and very different than what it was during prior war activities,” he said. “There’s more supply coming from the Atlantic and most [Asian] refiners already have procurement in West Africa, Brazil, the US and even the North Sea.”

Gernot Ruppelt, chief executive of product carrier owner Ardmore Shipping, pointed to similar upside in the clean trades.

“Of course, all eyes are on the Arabian Gulf, but markets are very much in motion in all parts of the world. We’ve seen rates jump in the US Gulf.

“That makes sense, because it’s all connected. Europe is structurally short diesel and we’re in this really interesting phase of trade dislocation where Europe has stopped buying diesel from Russia. It has brought diesel in from various places, but very much from the Middle East.

“If I put myself in the shoes of a Europe-based diesel buyer right now, I would probably take a really close look at how robust my inventory levels are, and how comfortable I am with my forward bookings, and I would very quickly start to move into some contingency planning.”

Replacement diesel can come from many sources, said Ruppelt. “It can come from the US Gulf or West Africa, or from further places like India — and I know it sounds crazy, but there’s nothing to stop product tankers from bringing that supply to Europe from China. There is an expectation that the Chinese export quota is going up.”

Kristian Sorenson, chief executive of BW LPG, cited the impact on demand for propane and butane cargoes aboard VLGCs.

“There is definitely a rush to secure cargoes and ships out of the Middle East, because it [Strait of Hormuz traffic] is uninterrupted. Also, we do see increased interest in securing cargoes and ships out of the US as an alternative to what eventually may or may not happen in the Middle East.

“The VLGC market is very much in the midst of this, and is being coloured by the geopolitical tensions and problems,” said Sorenson.

Surge in rates for VLCCs, LR2s and VLGCs

The Baltic Exchange time-charter equivalent spot index for VLCCs on the Middle East Gulf-China route continued its ascent on Thursday after a pause on Wednesday. It closed at $57,758 per day on Thursday, up 154% w/w to its highest level in 16 months.

In the product tanker sector, the Baltic’s TCE index for LR2s on the Middle East Gulf-Japan route came in at $53,836 per day, up 148% w/w. However, these rates do appear to have at least temporarily peaked. Thursday’s LR2 rate was down $1,157 per day or 5% versus Tuesday’s high.

In the LPG segment, the Baltic’s TCE index for VLGCs on the Middle East Gulf-Japan route was at $71,577 per day on Thursday, up 33% w/w. This is the highest day rate in any bulk commodity shipping segment.

“When we think about what’s happening in the Middle East, we’ve had kind of a jam-up of rates across different asset classes and different segments,” said Jefferies shipping analyst Omar Nokta. “VLGCs are the only ones that came from a position of strength into more strength. That tells us that the VLGC market is strong and close to really taking off.”

According to Ed Finley-Richardson of Contango Research, “I think that while everyone’s concentrating on tankers as the trade, LPG is probably going to be even better.”

The Middle East Gulf-Japan VLGC index is flat (down 0.5%) versus Thursday’s rate of $71,577 per day, which was the highest reading since June 4, 2024.

VLGC indexes are showing a clear impact of the Israel-Iran conflict and the threat to the Strait of Hormuz. The Middle East Gulf-Japan index is now $17,488 per day higher than the US Gulf-Japan index, over seven times the spread just one week ago.

* Lloyd’s List defines a tanker as being part of the Shadow Fleet if it engages in one or more deceptive shipping practices indicating that it is involved in the facilitation of sanctioned oil cargoes from Iran, Russia or Venezuela. Or it is sanctioned for participation in sanctioned oil trades or is sanctioned for links to a company that is sanctioned for facilitating the export of sanctioned oil.