War Risk Exclusions Impact Tanker Rates

In early February, oil markets were lulled by hope of a now-unlikely ceasefire in the Israel-Hamas war. But a recent string of Houthi attacks have reignited concerns about the Red Sea crisis, raising the floor for tanker rates, says an article published on freight waves website.

Summary

• Houthi attacks in the Red Sea have reignited concerns for tanker rates, prompting major maritime insurer Steamship Mutual to issue war risk exclusions for the Indian Ocean, Gulf of Aden, and Southern Red Sea.
• The introduction of new insurance terms for Red Sea routes could potentially inflate oil prices by more than $1 per barrel. Rerouting around Africa’s Cape of Good Hope, though an alternative, poses increased operational costs and higher vessel utilization.
• Some tankers continue to traverse the Red Sea at reduced levels compared to December. The average rate for very large crude carriers (VLCCs) from the Middle East to China has spiked to three-month highs at $66,600 per day.
• The surge in VLCC rates is reminiscent of past instances, such as in 2019, when geopolitical tensions and sanctions caused rates to soar. VLCC rates are anticipated to remain elevated between $40,000 and $50,000 per day in March, before gradually declining over the second quarter.

Houthi Attacks And Insurance Response

In February, hopes for a ceasefire in the Israel-Hamas war dwindled as Houthi attacks in the Red Sea resumed, raising concerns for tanker rates. The recent attack on the oil tanker M/T Pollux, claimed by the Iran-aligned Houthis, prompted major maritime insurer Steamship Mutual to issue war risk exclusions for the Indian Ocean, Gulf of Aden, and Southern Red Sea.

Impact On Oil Prices

The introduction of new insurance terms for Red Sea routes could potentially inflate oil prices by more than $1 per barrel, according to S&P Global Commodity Insights. Rerouting around Africa’s Cape of Good Hope, though an alternative, poses increased operational costs and higher vessel utilization.

Tanker Rate Surge Amidst Crisis

Increased Rates And Red Sea Activity

Despite the crisis, some tankers continue to traverse the Red Sea, albeit at reduced levels compared to December. Clarksons reports that arrivals of crude tankers in the Red Sea are currently at 50% to 60% of early December levels. Notably, the average rate for very large crude carriers (VLCCs) from the Middle East to China has spiked to three-month highs at $66,600 per day.

Historical Context And Future Projections

The surge in VLCC rates is reminiscent of past instances, such as in 2019, when geopolitical tensions and sanctions caused rates to soar. Analysts from Bank of America anticipate VLCC rates to remain elevated between $40,000 and $50,000 per day in March, before gradually declining over the second quarter.

Oil Market Dynamics And Tanker Demand

Oil Market Resilience And Seasonal Weakness

Despite the Red Sea crisis, oil prices have remained relatively stable, with fears of weak fundamentals overshadowing geopolitical risks. Standard Chartered notes that January’s global oil surplus, while present, is significantly less than in previous years. The Energy Information Administration predicts a considerable deficit in February, which could boost market confidence.

Factors Influencing Future Demand

U.S. crude oil exports have surged in 2024, indicating robust demand. Additionally, sanctions on entities violating price caps on Russian crude are expected to bolster demand in the legal tanker market. Saudi Arabia’s decision to halt expansion plans and the crackdown on Russia’s shadow fleet further contribute to the evolving landscape of oil supply and demand.

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Source: freight waves

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