Testing times in the Gulf of Oman

Little over a month after four tankers were damaged by explosions in the Middle East’s Gulf of Oman, another two tankers have been rocked by blasts in the same area. Last week, on 13 June, the methanol-carrying, Panama-listed Kokuka Courageous and the naptha-carrying, Marshall Islands-flagged Front Altair were both travelling south-eastwards through international waters — having gone through the strategically-important Strait of Hormuz — when damaging explosions took place.

Back on 12 May, four oil tankers — the Saudi-flagged Amjad and Al Marzoqah, the Norwegian-flagged Andrea Victory and the Emirati-flagged A Michel — had been attacked near the strait while at anchor off the UAE’s Port of Fujairah, with the blasts blowing holes in the hulls of the vessels. While early findings concerning the May explosions demonstrated a great likelihood of four limpet mines having been used in the attacks, the US military has put out a video it claimed shows Iran’s Revolutionary Guard removing an unexploded mine of this sort from one of the June vessels hours following the initial explosions. There were no deaths as a result of all the explosions.

Positioning key

Location is key in all of these incidents. Both sets of explosions took place close to the Strait of Hormuz, a critical oil chokepoint. It might only have a width of 21 nautical miles at its most narrow, but the waterway sees 20% of global oil exports — nearly 19m barrels of oil daily — pass through it. Sufficiently deep and wide to cope with the biggest crude oil tankers in the world, the passage connects Middle Eastern crude oil producers to key markets across the globe. Additionally, the strait serves as the main route for Iran’s oil exports.

At the moment there is heightened tension around the waterway, with potential for Iran to block all oil leaving through the strait. Following the US’ withdrawal last year from an international nuclear deal with Iran, the two countries’ relations have been increasingly tense. Last November, US President Donald Trump made sanctions against the Middle Eastern nation tighter, and in April, he told countries that they could also face sanctions if they kept purchasing oil from Iran.

The waterway’s role as the primary route for oil exports from Iran is “a big deal” for the economy of the Western Asian nation — oil constitutes about two-thirds of Middle East exports. Iran has made it clear that it is unhappy about a ban on its oil sales, and claims that it can stop all oil exiting through the strait.

“If one day, [the US] tries to stop Iran’s oil exports, then no oil can be exported from the Persian Gulf,” Iran’s President, Hassan Rouhani, has stated.

A lack of oil route stability will lead to a rise in oil prices around the globe. “Any instability in oil routes means higher oil prices across the world, having huge effects on any industry dependent on oil,” the US military said in its video. “One tangible example could be your car’s petrol price, 70% of which is dependent on the price of crude oil.”

The shipping reaction

Following the second set of blasts, insurance rates have spiked and some captains have reportedly refused to sail in the region threatening one of the biggest disruptions to crude oil trading in the Strait of Hormuz for many years. News of the explosions triggered steep oil price hikes on the day of the incidents. Shipowners reported that after the first set of explosions, premiums had gone up by 5% to 15% depending on cargo and size.

Commenting on the attacks, BIMCO chief shipping analyst Peter Sand said: “This will likely cause shipowners and operators to ask for a premium on freight rates for trading in the area, as risk is now clear and present.”

International Maritime Organization (IMO) secretary general Kitack Lim expressed his concern over both sets of explosions during the 101st session of the body’s Maritime Safety Committee, held 5-14 June: “IMO has developed a comprehensive regime of regulation through the [International Ship and Port Facility Security] Code and the SUA Conventions and Protocols to prevent and respond to unprovoked, unlawful attacks on merchant shipping,” he noted. “The threat to ships and their crews, peaceably going about their business, is intolerable. I urge all member states to redouble their efforts to work together to find a lasting solution to ensure the safety and security of international shipping around the globe and protection of the marine environment. I will carefully review the results of the investigations, once they are completed, to consider if additional IMO action is warranted.”

The Strait of Hormuz now has a higher risk premium than any other seaborne trade route. Speaking to Wall Street Journal, Karatzas Marine Advisors chief executive Basil Karatzas said that there will be a significant rise in freight rates for crude oil tankers, adding that as insurance rates go up and vessel operating expenses grow to cover more compensation. “It could be a déjà vu of the Gulf War days in the early 1990s, when tankers in the Gulf were earning a multiple of the average market,” he said.

BIMCO is advising its members doing business in the area to exercise extreme caution and instruct their vessels to take precautions. Mr Sand advised considering telling vessels to avoid the area or to keep as far away as possible — to the extent operations permit and depending on a firm’s risk-acceptance levels.
Source: Baltic Exchange