THE shipping industry’s ability to adapt to crisis has become one of the defining features of today’s oil market. Despite months of disruption to normal trade flows through the Strait of Hormuz, fears of a sudden global oil shortage have given way to something more complex: a costly and increasingly fragile equilibrium.

Since February, Middle East Gulf producers and shipping markets have engineered a series of workarounds to keep crude moving. Millions of barrels per day have been rerouted through Saudi Arabia’s East-West Pipeline to Yanbu, while longer voyages around the Cape of Good Hope have added significant tonne-mile demand to an already stretched tanker fleet.

At the same time, MEG national oil companies have built increasingly elaborate logistics chains to manage regional security risks. Adnoc was among the first to deploy dedicated shuttle tanker operations between the MEG and safer transfer locations, paying eye-watering premium for tonnage. Similar models are now being replicated elsewhere in the region, all supported by war risk insurance cover that, at the most extreme end of the market, has reached unprecedented levels.

The result has been a tanker market operating in unfamiliar territory. Freight rates remain elevated not only for MEG-related trades, but across the wider crude market as vessels are tied up on longer voyages and supply chains become less efficient.

Yet the most remarkable aspect of the current crisis is that oil is still flowing.

That apparent resilience, however, masks growing strains elsewhere in the system. While crude prices continue to attract most headlines, refining capacity and product inventories are emerging as the more significant concern. Strategic petroleum reserves have been heavily drawn down since the disruption began, while global refining networks are operating at increasingly high utilisation rates to compensate for reduced exports from parts of the Middle East and damage to Russian refining infrastructure.

The market has therefore shifted from worrying about access to crude to worrying about the availability of refined products. Diesel prices in several regions already reflect that pressure.

Shipping has provided an important part of the workaround preventing a supply shock from becoming a full-scale energy crisis. China, and the MEG states’ willingness to concentrate the lion’s share of the Hormuz risk on their own books has arguably made the biggest difference.

But adaptation is not the same as normalisation. The longer the market depends on expensive detours, emergency stock releases and complicated logistics workarounds, the greater the risk that stresses elsewhere in the system begin to surface.

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

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