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What consequences do growing tensions in the Strait of Hormuz have for the wider shipping industry?

Saturday, 27 July 2019 | 00:00

Tensions continue to rise in an area described as the most important chokepoint in the oil transportation system globally. In July, the British-flagged chemical/oil products tanker Stena Impero was seized in the zone in question, the Strait of Hormuz, by the Islamic Revolutionary Guard Corps (part of the Iranian Armed Forces) after Iran accused it of “violating international maritime rules”. The move, described the UK Government as “unacceptable and highly escalatory”, occurred a fortnight after the UK’s Royal Marines aided with the seizure of the Panamanian-flagged crude oil tanker Grace 1 off Gibraltar due to evidence it was moving Iranian oil to Syria in violation of EU sanctions.

In recent times, there have been increasingly-strained relations between Iran, the US and the UK in the region in which the strait is located. In June, Baltic Briefing reported that little over a month after four tankers (Saudi, Norwegian and Emirati-flagged) had been attacked near the passage, two other tankers (Panamanian-listed and Marshallese-flagged) saw June blasts after travelling through it. Earlier this month, UK Royal Navy frigate HMS Montrose reportedly saw away three Iranian ships attempting to halt the tanker British Heritage in the waterway (the ship was apparently travelling out of the Gulf through the strait when it was approached by the vessels).

A week on, US officials believed Iran had seized a Panamanian-flagged UAE oil tanker as it crossed the passage, with Iran later claiming that the Islamic Revolutionary Guard Corps had taken control of a foreign oil tanker and its crew for smuggling fuel out of the country. The next day, US President Donald Trump claimed that the United States Navy’s USS Boxer (LHD-4) amphibious assault ship had shot down an Iranian drone that had come within 1,000 yards of the warship and ignored calls to stand down, but Iranian military officials denied an Iranian drone had been lost in the strait.

Insurance implications

Jonathan Moss, head of transport and marine at law firm DWF, calls the seizure of the Stena Impero “unacceptable and clearly an act of retaliation as a consequence for the British authorities seizing the Iranian Grace 1 supertanker offshore [of] Gibraltar on 4 July”. According to him, the increasing tensions caused by these incidents will keep having a knock-on impact on worldwide fuel prices and insurance premiums.

“The global insurance markets are accustomed to factoring geopolitical uncertainty into pricing models,” he says. “Nevertheless, this geopolitical fallout has not been seen since 2003. In 2003, rates for Hull & Machinery [and] War Risks cover for tankers in the Persian Gulf increased significantly owing to the political instability in the region. In particular, global marine insurers are already closely monitoring the current situation and employing complex risk models.”

He continues: “Given the hostility escalating, underwriters will also be closely scrutinising voyages on a case-by-case basis, with premium-increases covering vessels in the region a near-certainty. Ultimately, this uncertainty in the Gulf region is likely to lead insurers to raise premiums, re-negotiate terms of cover and introduce riders to marine and energy contracts of insurance and reinsurance, in the face of a cocktail of instability in the region.”

Speaking on American business news channel CNBC, Esben Poulsson, International Chamber of Shipping chairman, said that the main direct cost, being felt immediately, from the tensions is the insurance premium, which has increased anywhere between threefold and fourfold since the situation commenced. What’s more, he claimed the shipowner is set to absorb this cost.

“The shipowner will, of course, attempt to pass the cost on to charterers in cases where this could apply, but largely speaking, it is a cost for the owner.”

Broader issues at stake

The elevated tensions in the Strait of Hormuz region are unsettling for the seafarers who have to enter it too. Speaking to Bloomberg, tanker captain John Smith, whose name had been changed to protect his identity, is “acutely aware of his powerlessness to protect his crew and ship”. At the time of speaking, Mr Smith is about to move the tanker through the strait, and he says that everyone on board and families back home are scared of the situation. According to the Bloomberg article, shipowners are asking crews on vessels passing Hormuz to implement “best management practices” designed to combat a piracy increase off the coast of Somalia — however, the military threat of the Islamic Revolutionary Guard Corps is a totally-different thing.

“We do have drills where we play through scenarios,” Mr Smith explains. “How effective this training would be with multinational crews, I cannot tell you. As far as I am concerned, we always think about the ‘what ifs’.”

He adds: “It is always going through my mind thinking about collision avoidance, if the other ship does something stupid and how you get out of a situation. I suppose it’s the same with what we are approaching.”

Mr Smith says that when his ship travels through the Strait of Hormuz, six people will be on the bridge keeping watch for the approach of “‘fast boats’”. However, he notes he is “not sure six people on the bridge will have any deterrent effect on troops abseiling down onto the ship from a helicopter”.

According to the International Energy Agency (IEA), the oil market is well supplied at the moment so the impact on the commodity market could be minimal. In H1 2019, oil production exceeded demand, increasing world stocks by 900,000 barrels daily. Currently, Organisation for Economic Co-operation and Development commercial stocks stand at over 2.9bn barrels — greater than the five-year average.

“IEA countries hold 1.55bn barrels of public emergency oil stocks,” the agency says. “In addition, 650m barrels are held by industry under government obligations, and can be released as needed. These IEA emergency stocks are large enough to cover any disruptions in oil supply from the Strait of Hormuz for an extended period.”

Reassuringly, the IEA also notes that if a disruption occurs, the organisation is prepared “to act quickly and decisively” to ensure world markets stay sufficiently supplied.
Source: The Baltic Exchange

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