Concerns about a potential Iranian blockade of the Strait of Hormuz, a crucial passage for global oil and gas transportation, are causing an increase in oil prices and insurance rates. Although such a blockade would have a significant impact on energy markets, historical precedents and the U.S. Navy’s rapid response capabilities indicate that any disruption would likely be brief.
Key Takeaways
- Escalating tensions between Iran and Israel, including U.S. strikes on Iranian nuclear sites, have heightened concerns about oil supply disruptions.
- The Strait of Hormuz, through which 20% of global oil and gas flows, is a primary focus of these fears.
- Marine insurance costs for Middle East conflict zones have surged, with war risk premiums tripling for some routes.
- Despite the threats, Middle Eastern producers continue to export oil at near-normal rates.
- Historical data suggests that severe oil supply disruptions tend to be short-lived due to rapid international responses and available spare capacity.
Rising Tensions And Their Impact On Oil Markets
Recent U.S. strikes on Iranian nuclear facilities have significantly escalated tensions in the Middle East, resulting in a surge in global oil prices. Since June 13, Brent crude prices have increased by 10%, rising to over $77 a barrel. A primary concern is the Strait of Hormuz, a narrow waterway between Iran and Oman that is crucial for the transportation of approximately 20 million barrels per day (b/d) of crude oil, condensate, and fuel.
Iran has previously threatened to target ships associated with Israel and its allies near the Strait of Hormuz. The country has a history of attacking or detaining vessels during times of heightened tension. Although a complete closure of the Strait is considered highly unlikely, the threat alone has led to a significant increase in marine insurance costs.
Soaring Insurance Premiums
Marine insurance rates for energy and commodity transport in Middle Eastern conflict zones have seen a dramatic increase. According to Marcus Baker of Marsh McLennan:
- War risk premiums for cargo ships sailing to Israeli ports have more than tripled, from 0.2% to 0.7% of hull and machinery (H&M) value.
- Premiums for ships transiting the Red Sea have climbed to 0.25%-0.30% from 0.2%-0.25%.
- For the Persian Gulf, premiums have risen to 0.2% from 0.125%.
Total insurance costs for a VLCC transporting oil from Ras Tanura, Saudi Arabia, to Ningbo, China, jumped from $0.25/b to $0.7/b-$0.8/b overnight on June 13. Underwriters are also seeking more flexible terms, with quotes valid for only 24 hours and 96-hour cancellation clauses becoming standard.
Historical Context And Spare Capacity
Although Iran has the capability to disrupt the Strait of Hormuz, history suggests that any such disruption would likely be short-lived. Past events, such as the “Tanker Wars” of the 1980s and more recent conflicts, have demonstrated that while Iran can interfere with maritime traffic, a lasting supply shock is unlikely due to the swift and strong response from the U.S. Navy.
Additionally, the global oil market currently has substantial spare capacity. OPEC+ holds approximately 5.7 million barrels per day (b/d) of excess capacity, with Saudi Arabia and the United Arab Emirates accounting for 4.2 million b/d of that. Both countries also have pipelines that can bypass the Strait of Hormuz, though these alternative routes may encounter their own set of challenges.
Although immediate tensions tend to lead to a sharp increase in crude oil prices, the long-term effects of a blockade in the Strait of Hormuz are expected to be less severe than anticipated, as market dynamics and international responses would likely help stabilize supply.
Sources
- Insurance rates jump in Middle East conflict zones amid Iran-Israel attacks, Hellenic Shipping News.
- VLCC Tanker Market Riding the Wave of Middle East Tensions, Hellenic Shipping News.
- Oil Prices Jump More Than 1% on Middle East Supply Fears – Canadian Energy News, Top Headlines, Commentaries,
Features & Events, EnergyNow. - Iran oil doomsday in Hormuz may be more fear than reality, Reuters.
- IN VOGUE: The U.S. Strike in Iran-Insecurity About Global Oil Supply Suddenly Makes Canadian Oil Attractive –
Maureen McCall – Canadian Energy News, Top Headlines, Commentaries, Features & Events, EnergyNow.
