Tanker Squeeze Adds Insult to Oil Injury amid Iran War
- Tanker markets are under extreme strain, with VLCC rates exceeding $420,000 per day and very few supertankers available in the Persian Gulf as insurance cancellations and security risks reduce traffic through the Strait of Hormuz.
- Structural constraints are worsening the shortage, including sanctions on Russian tankers, consolidation in the tanker market, and Sinokor’s growing control over available VLCC capacity.
- Prolonged disruption could force major production shut-ins, with Iraq already cutting 1.5 million bpd and analysts warning that global shut-ins could reach nearly 5 million bpd if Hormuz remains disrupted for several weeks.
Tanker rates are through the roof, movement through the Strait of Hormuz is severely reduced because of war cover cancellations by insurers, and the combination of these developments has sent oil prices flying. Now, there’s a third factor that would likely aggravate the situation further: there are not enough supertankers.
Bloomberg reported the news this week, saying there were between six and a dozen supertankers that were available for booking in the Persian Gulf, if, of course, the potential client was willing to pay the record daily rates and deal with insurance. Twelve supertankers could theoretically be enough to handle one day’s outbound oil traffic – but no more than that. Every supertanker can carry 2 million barrels of crude and, as Bloomberg notes in its report, it takes two days to load.
It is worth noting that the squeeze on supertankers available for loading Middle Eastern oil comes on top of already rising freight rates on the back of tightening sanctions on vessels carrying Russian oil, a consolidation drive in the tanker segment, and the U.S. takeover of Venezuela’s oil industry.
The trend has been going on for a while. Last November, the tanker rates on the route from the Middle East and China hit a five-year high as s traders rushed to find alternatives to Russian crude after the U.S. sanctioned Russia’s biggest oil producers and exporters, Rosneft and Lukoil. Then, in January, rates dipped amid seasonal weakening in trade, only to rebound in February amid growing tensions between the United States and Iran.
Yet there is more. South Korean shipping company Sinokor has been on a supertanker buying spree that has resulted in what Bloomberg called “unprecedented control” over a substantial portion of the world’s supertankers for immediate booking. This has also contributed to higher tanker rates—for routes beginning at the U.S. Gulf Coast. Indeed, Bloomberg reported that Sinokor, along with its partner Mediterranean Shipping Co., “controlled almost all the VLCCs available for hire to load oil from the U.S. Gulf Coast.”
Meanwhile, the freight rate for a supertanker carrying crude oil on the key Middle East-to-China route hit a record high of more than $420,000 per day this Monday, and the rally is likely far from done, seeing as the missile strike exchange between the United States and Israel, and Iran continues unabated for the time being. Average supertanker rates globally have hit over $280,900. There are reports of Iranian forces attacking tankers in the Strait of Hormuz. The security situation, in other words, does not look good.
This means that at some point oil production would get affected, analysts are warning. “With the Strait of Hormuz still inactive, the clock is ticking,” JPMorgan analysts said in a note earlier this week. “If it does not reopen within 21 days, upstream shut?ins could begin.” In fact, upstream shut-ins have already begun in Iraq.
The situation in the Persian Gulf has forced OPEC’s second-largest producer to shut in as much as 1.5 million barrels daily in production, and this could be just the beginning, with further shut-ins likely to bring the total to 3 million barrels daily, according to Iraqi officials. That amount is almost equal to Iraq’s entire export volumes, which average between 3.2 million and 3.4 million barrels daily. Interestingly, the amount of 3 million barrels daily is also approximately equal to the global supply overhang as estimated by the International Energy Agency. And Iraq will not be the only one shutting in production if the war is prolonged.
Indeed, earlier today, JP Morgan analysts released another note, warning that Iraq would be forced to suspend all oil exports in three days and Kuwait has 14 days of storage space. The more time passes, the worse it would get, too, with the bank’s analysts estimating production shut-ins at 4.7 million barrels daily by the 18th day of Hormuz disruption.
What is happening, then, is an already bad situation becoming a lot worse, very fast. Tanker rates were already high to begin with. As the U.S. and Israel started firing missiles at Iran, insurers decided they did not need that risk in their lives, making matters worse. Meanwhile, Sinokor has become the dominant player on that very same troubled tanker market, setting the price for a major alternative oil export route: from the U.S. Gulf Coast. And there are dozens of tankers under sanctions, which limits their availability, to put it mildly.
Some observers make a point of noting that Iran cannot physically block the Hormuz Strait. Yet evidence suggests it does not need to. Just warning that it would attack tankers if they try to enter has been enough: tanker traffic on Monday consisted of one or two mid-sized vessels, per data from Kpler and Vortexa. The oil market should brace up for more blows.
By Irina Slav for Oilprice.com
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