Headlines such as “Iranian mines in the Straits of Hormuz could shut down a fifth of oil flows in a week” are designed to garner attention but we hope to be able to offer a more considered, useful perspective from our range of close sources in the region. The fast twitch fibres of shipping industry participants are well conditioned to shocks and disruption, having had to endure over the past 5 years a global pandemic, crises limiting traffic at the Suez and Panama canals, the physical and economic fallout from the Ukraine war, and attacks on merchant vessels in the Red Sea.
Shipping is feeling the impact of the hostile environment created by the attacks between Israel and Iran. The Joint Maritime Information Centre (JMIC) reports “electronic interference stemming from the vicinity of Bandar Abbas (in Iran), in the Strait of Hormuz and several other areas in the Arabian Gulf”. While the JMIC also says the “threat level remains elevated”, the situation is not yet one of shipping coming under direct threat. A collision this morning off Fujairah between the VLCC Front Eagle and an Aframax of the shadow fleet, Adalynn, with “clear GPS spoofing involved in the run-up to the accident”, was categorized as a navigational incident unrelated to the conflict. While tensions remain high and hostilities escalate, to a degree shipowners “self-regulate”, for example Frontline and others are refusing new contracts to sail into the Gulf through the Strait of Hormuz. The high volume CPP MR market currently has numerous outstanding spot cargoes to load from the GCC, and a shortage of owners willing to offer on them. Products and crude markets are prone to rapid movement in rates (both up and down), more so than chemicals, so we will be watching this closely. To date, increases in AWRP in the Gulf are not being seen. Some shipowners we talk to are expecting updates from their underwriters today, others later this week, and typically they would get 24-48 hrs notice of any increases.
Examining the nature of the conflict, Israel’s specified target is Iranian nuclear infrastructure, and more recently appeals to the Iranian people, perhaps to effect regime change. Israel’s latest military actions were pre-empted by surgical strikes last year to neutralize a large amount of Iran’s air defenses, and reportedly significant clandestine operations by Mossad inside Iran. While some refineries have been targeted on both sides, Israel has not so far shown any sign of targeting Iran’s ports in the Gulf. Looser targeting on the coastlines could easily entangle third party country maritime interests and this seems to be not the desired goal of Israel nor Iran. Notwithstanding the law of unintended consequences, the risk to shipping of direct attacks remains low, despite its obvious exposure. This could change if third party countries involve themselves in the conflict, a clear escalation.
The implication by US President Trump is that if the US gets directly involved, it will be with force intended to bring about an end to the conflict, a “complete give-up” by Iran, in his words. Matched by the extreme rhetoric from Iran, taken at face value, further short-term escalation may be unavoidable. However, Trump is also trying to placate that section of his voter base which helped put him in office on a promise not to involve the US in more costly wars. Trump may be counting on rapid strategic success combined with even greater intimidation to bring Iran back to the table to negotiate, from a weaker position – asserting that they “should have taken the deal that was on the table”. Iran’s military means will be seriously tested and Iran’s proxies in the region are largely on the backfoot after sustained military campaigns by Israel and its allies.
Other powers in the region notably Saudi Arabia and the United Arab Emirates, are trying hard to avoid being caught in the crossfire. It has been seen in the past few years the extent to which the leaders of these states are putting economic interests first, and their infrastructure is extremely vulnerable to attack. This was seen in 2019 when attacks targeted against the Abqaiq and Khurai oil processing facilities temporarily knocked out about 50% of Saudi oil production, attacks which were claimed by the Houthis but later suggested by US and Saudi officials to have originated from Iranian territory. These attacks, and cross-border strikes from Yemen on Abu Dhabi in 2022, were effective in compelling the KSA and the UAE to scale back their participation in the ground offensive in Yemen against the Houthis. Iraq, even more precariously positioned and hosting many US interests which Tehran has said will be targets in case of US involvement in the conflict, on Friday filed a complaint with the United Nations Security Council over Israel’s “violation of Iraqi airspace” and made a formal request to the US to prevent Israeli aircraft from using Iraqi airspace to target Iran.
For now, the tanker market is taking a “wait-and-see” approach. The G7 has stopped short of calling for a ceasefire, suggesting alternative actions are being discussed at a high level. We hope for the cessation of hostilities as soon as possible. In the interim, chemical tanker owners running contracts of affreightment are perhaps more inclined to meet existing contractual obligations than spot players, although ultimately safety will come first. We may see some additional spot enquiry as fallout from contract nominations if the security situation worsens. For pragmatic spot chemical tanker players, a tighter market in Southeast Asia is a fairly attractive prospect, while they wait for the dust to settle in the Middle East.
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By Simon Cass
Managing Director
Quincannon Associates DMCC | Dubai