How will the Israel-Iran conflict affect the oil tanker market?

The escalation of the Israel-Iran conflict has immediately sent oil prices and tanker rates soaring, but the long-term impact remains unknown, depending on the risk of disruption to vital shipping routes.

Strait-of-Hormuz

Strait of Hormuz (Photo: MarketWatch)

Early Friday, June 13, Israel launched multiple airstrikes on Iran, targeting command and control centers, ballistic missile bases and air defense units, and nuclear facilities. In a swift response, Iran launched a drone attack on Israel, but it was largely ineffective. Most of them were shot down and no significant damage was reported. Iran has since begun firing ballistic missiles at Israel.

Iran still has options for retaliation. They could attempt to close the Strait of Hormuz or disrupt shipping at this maritime chokepoint, through which more than 20% of global oil supplies pass. They could attack oil facilities in neighboring countries or target US military bases in the region.

However, all of these potential actions carry significant risks. Closing the Strait of Hormuz or attacking energy infrastructure in the region would send energy prices soaring, turn all of their neighbors into adversaries, and very likely draw the US military, which has a large presence in the region, into the conflict. Closing the Strait of Hormuz could also hamper Iran’s own ability to export and create incentives for Israel and/or the United States to attack its energy infrastructure (refineries, pipelines, export terminals, etc.). Loss of energy export revenues would quickly deplete Iran’s resources and ability to retaliate.

In the immediate aftermath of the Israeli attacks, both oil prices and tanker freight rates increased. This was expected and a normal response to heightened geopolitical tensions and the risk of significant disruptions to global energy supplies. The direction of oil prices in the coming days and weeks will depend on whether there are actual disruptions to oil supplies. Overall, the global oil market is well supplied and global inventories are at safe levels. However, Iran’s supply is increasingly at risk. Even before the Israeli attacks, most oil market forecasts assumed a decline in Iranian production in the coming months, resulting in a reduction of around 400,000-500,000 barrels per day in Iranian exports. This figure could increase if the conflict escalates. China’s independent refiners, who buy almost all of Iran’s oil, will need to look for alternative crude supplies, and they may try to buy more discounted crude from Russia or look elsewhere in the Middle East.

Tanker rates have also increased following the attacks, particularly for VLCCs (very large crude carriers), the main type of vessel used for exports from the Arabian Gulf. Like the oil price reaction, this is a normal development in these circumstances. Rates for the standard VLCC route from the Arabian Gulf eastbound have increased from WS43 to W55. However, while the increase is significant in percentage terms, the tanker market is still in the summer lull. Rates may continue to rise in the coming days, depending on how the conflict develops, but there is also a chance that the market will weaken again after the weekend. In previous conflicts, charterers have sometimes panicked and, in an effort to secure more cargo, chartering activity has spiked. At the same time, shipowners have become increasingly reluctant to sail into high-risk areas such as the Arabian Gulf. The combination of these factors would push tanker freight rates up very quickly. We are not in that scenario yet. According to our tanker brokers, chartering activity has not spiked so far and most shipowners are still willing to sail their vessels into the Arabian Gulf. However, this could change quickly. Stay tuned for further developments.

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