HOW the Strait of Hormuz closure plays out over time for tanker rates is uncertain, but there’s a working theory, and the indexes are starting to follow the script.

The longer the strait is closed, the more very large crude carriers shift to other loading regions like Nigeria, the US Gulf, Brazil and Guyana. Because those regions cannot fully replace Middle East Gulf crude supply and more vessel capacity is headed their way, non-MEG spot rates should fall.

There is virtually no non-Iranian crude loading at ports inside the strait, but there is rising activity at Yanbu, Saudi Arabia, at the Red Sea terminus of the East-West Pipeline, as well as some loadings at MEG ports outside of the strait.

Yanbu loadings and other regional loadings provide reference data to continue publishing the MEG VLCC spot rate indexes.

These tankers face higher risks: VLCCs loading in Yanbu must do two transits of the Bab el Mandeb, and the Iranians are bombing MEG ports outside of the strait.

The Hormuz closure and the emergency throughput hike via the East-West pipeline is bringing an unusually high number of VLCCs through the Bab el Mandeb, highlighting how crucial it is that the Houthis hold their fire and do not join the Iranian cause.

The higher risk in the Middle East region, combined with the higher number of VLCCs heading to the Atlantic to avoid that risk, is causing the MEG and non-MEG VLCC indexes to diverge.

The Baltic Exchange’s MEG-Singapore VLCC time-charter equivalent index was at $484,890 per day on Wednesday, down only 5% from its wartime high.

The MEG-China index was at $451,461 per day, down only 7%.

According to the Tankers International pool, Sinokor’s Gabon Prosperity (IMO: 9457543) was placed on subs to MRPL on Wednesday for a Red Sea-India voyage loading March 22-26 at a TCE rate of $356,938 per day.

On Monday, Minerva’s Pantanassa (IMO: 9424261) was fully fixed to S-Oil for a voyage from Oman to South Korea loading March 22-24 at an astronomical $554,771 per day.

VLCCs load in Oman at Mina al Fahal near Muscat (Pantanassa is currently waiting offshore of the terminal). Oman’s port of Salalah — well to the south of Muscat and much farther from Iran than Mina al Fahal — was struck by Iranian drones on Wednesday, igniting fuel tanks and closing the container terminals.

The market trend in the lower-risk Atlantic basin is much different.

The West Africa-China index was at $168,220 per day on Wednesday, down 39% from its wartime peak to the lowest level since February 24.

The US Gulf-China index was at $140,0765 per day, down 35% from its recent high, to its lowest level since February 27. 

“The Atlantic has seen a downward correction,” said Fearnleys on Wednesday. “Rates from the Middle East are on paper double those from the Atlantic, but an owner will only be paid if the ship physically loads and performs the intended voyage.”

US-listed stocks of VLCC owners have declined since their wartime peak on March 2, when these shares reached multi-decade or all-time highs.

Since March 2, shares of Frontline are down 15%, with Okeanis Eco Tankers down 13%, DHT 9% and International Seaways 8%.

“Leading up to this event, there were a lot of discussions around this being a huge risk that was starting to get priced into the equities,” said DNB Carnegie shipping analyst Jorgen Lian at the Capital Link International Shipping Forum in New York on Monday.

“In our opinion, you saw this reflected in the equities over a sustained period of time, up until the event itself.

“Now that the event has actually happened…you’ve already priced in the risk of it happening, but that didn’t really reflect the risk in terms of volumes that were actually set to disappear.

“You are starting to see the realisation that transferring [the spot rates] into actual value for the companies you can invest in is more challenging than you first thought, and also, that it is hard to see an outcome where things can get even more elevated. So, downside risks clearly outweigh upside risks in the current situation,” said Lian.

Some listed VLCC owners have secured highly elevated rates recently, however, most of their tankers are on voyages that began before the conflict.

Furthermore, when ships do open up, public companies are more likely to seek cargoes in safe regions in the Atlantic basin than to transit the Bab el Mandeb to capture peak rates in Yanbu.

“We’ve warned our clients that you can’t look at these headline rates as a proxy for what people are actually earning,” said Deutsche Bank shipping analyst Chris Robertson.

“When rates are extremely volatile from week to week, the connection between what the average reported rate is and what companies actually earn is more broken. That’s related to all sorts of reasons, not the least of which is when a company has a ship available to fix.”

Lian said, “It’s very important when you gauge the expectations for how much cashflow is actually coming into these companies at the moment to understand that the theoretical quoted rates that people follow on a day-to-day basis aren’t readily available for everyone.”

On a positive note, non-MEG rates, while falling, are still exceptionally strong. Even if public tanker companies don’t capture the highest rates, they should still be very profitable.

According to Liam Burke, shipping analyst at B. Riley Securities, “These companies have managed down their cash cost per vessel. As the rate numbers come down, you have low cash costs and you still have good operating leverage.

“If you’re sourcing oil out of West Africa or Latin America, there’s not a lot of risk there. Costs are what they are, and you’re still going to generate pretty good rates. Our argument is that when rates come back to Earth, they’re still going to be elevated by historical standards and the operating leverage will still be there.”