A tripling in cargo insurance costs for tankers and record increases in freight rates have been recorded within hours, as shipowners and charterers react to growing uncertainty in the Middle East due to the escalating Israel-Iran conflict.
According to Xclusiv Shipbrokers, for a VLCC (Very Large Crude Carrier) operating the route from Ras Tanura, Saudi Arabia to Ningbo, China, the war risk insurance cost rose from $0.25/barrel last Thursday to $0.70–$0.80/barrel by Friday.
At the same time, 96-hour cancellation clauses are now systematically added to contracts, reflecting the prevailing insecurity in the crude oil market.
🚢 TD3C Index & Freight Market Dynamics
The TD3C index, which tracks routes from the Persian Gulf to Asia, jumped eight points overnight for July loadings, indicating strong demand for available vessels amid fears of delays or attacks on critical sea lanes.
For LR2 tankers from the Arabian Gulf to Europe (UK Continent), charterers are now opting for the safer but significantly more expensive route via the Cape of Good Hope, paying up to $600,000 extra.
Owners of supertankers are demanding partial prepayment of freight, and many July cargoes have already been repriced mid-voyage, as profit margin requirements exceed spot prices.
🔥 Natural Gas Market Pressures
Global dependence on LNG (liquefied natural gas) remains high. Qatar, which supplies 18% of global LNG, and the UAE continue to ship large volumes through the Strait of Hormuz.
China is one of the largest buyers, importing about 26.9 million tons annually, or one in four cargoes it receives.
Any disruption in Hormuz flows would severely impact the Pacific region, pushing buyers toward the Atlantic basin, increasing demand and further driving up prices.
In shipping, forward LNG charter rates have reached $110,000/day, with charterers seeking modern dual-fuel vessels capable of routes from East Asia to Africa.
⚠️ Two Scenarios for the Strait of Hormuz
Scenario A – Full Closure:
- Iran claims pipelines are operating normally, and satellite data shows no unusual activity at Kharg Island, the main crude export terminal.
- A two-week closure could remove 6 million barrels/day from the system, pushing OECD inventories below the 5-year average within six weeks.
- This could drive Brent crude toward $90–$100/barrel and sustain high freight rates across crude, product, and gas markets.
- JP Morgan forecasts oil prices to remain around $60 through 2025–2026, but acknowledges that worst-case scenarios could double prices.
- A full closure would cause a temporary spike in crude freight rates, but cargo availability issues could lead to short- and long-term losses.
Scenario B – Partial Disruption:
- Iran may engage in selective actions, such as attacks or interference with tankers, possibly via Houthi activity in the Red Sea.
- Despite U.S. efforts to reduce Houthi capabilities, their effectiveness remains uncertain.
- Many shipowners are considering avoiding Hormuz, favoring Atlantic loading zones.
- This reduces vessel availability in the East, tightening the crude shipping market and pushing up rates, especially for “dirty crude”.
- While Gulf oil exports may not fully stop, transport capacity shortages could drive prices higher.
- Atlantic producers like the U.S. and Brazil may benefit from increased demand due to their distance from conflict zones.
📊 Market Outlook
- FFA (Forward Freight Agreement) analysts expect VLCC earnings on the Middle East–China route to exceed $40,000/day in July.
- These forecasts reflect rising uncertainty and bullish sentiment in the tanker market.
- The pressure extends beyond the Gulf. Mitsui O.S.K. has issued fleet safety warnings, and UKMTO reports fast boat activity and drone threats in the Red Sea.
- Each added layer of caution lengthens voyages, traps ships in queues, and reduces effective supply, boosting demand for VLCCs, LR2s, and MR carriers.
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