Israel-Iran conflict sends Middle East oil shipping costs higher

Worries over potential disruptions stemming from the Israel-Iran conflict are impacting the oil shipping industry. 

The costs associated with chartering tankers to transport oil from the Middle East to Asia have risen, leading to a slowdown in ship bookings, according to a Reuters report.

Tensions in the Middle East escalated last week after Israel carried out strikes in Iran. Tehran reportedly retaliated with strikes of its own. 

The TD3 benchmark rate, which governs the cost of chartering a Very Large Crude Carrier (VLCC) for crude oil shipments from the Middle East Gulf (MEG) to Japan, experienced a dramatic surge on Friday. 

Data from LSEG indicates that this global benchmark rate escalated by more than 20% following the emergence of heightened regional tensions. 

The significant increase underscores the immediate and substantial impact geopolitical instability can have on global shipping costs, particularly for critical commodities like oil. 

The rise in TD3 rates suggests that shipowners are factoring in increased risk premiums due to the current climate, potentially leading to higher freight costs for oil importers in key Asian markets such as Japan. 

According to a shipbroker, the MEG-Japan rate for crude remained stable at approximately W55 on the Worldscale industry measure on Monday.

Cautious approach

Traders, shipbrokers, and charterers adopted a wait-and-watch approach, limiting further increases in freight rates. 

The shipping industry’s cautious stance prevailed even though market participants did not anticipate the closure of the Strait of Hormuz, a crucial trade route.

“Fixing on Friday from the region all but came to a standstill. Physical marks may therefore not be indicative. Ships inside the gulf are still looking for outbound charters,” Anoop Singh, global head of shipping research at Oil Brokerage, was quoted as saying in the report.

But the situation remains dynamic, and we expect to hear more on market open today,

Freight rates are subject to escalation and potential Iranian action concerning the Strait of Hormuz, according to Emril Jamil, senior analyst for crude and fuel oil at LSEG Oil Research. 

Approximately 18 million to 19 million barrels of oil and oil products traverse the Strait of Hormuz waterway daily, connecting the Gulf to the Gulf of Oman.

“We have noted a minor increase in freight rates so far, but expect them to rise further as the week progresses,” according to Sentosa Shipbrokers.

War risk premium

Emril Jamil of LSEG added:

The war risk premium is expected to remain high in the near-term given the continued exchange of tensions between the two countries.

This will exponentially rise if other Middle East oil and gas infrastructure are attacked.

Additional attacks could drive cargo insurance premiums up by $3 to $8 per barrel.

Before the conflict, freight rates for shipping approximately 90,000 tons of clean products (gasoline, diesel, or jet fuel) from the Middle East to markets west of the Suez Canal were estimated at $3.3 million to $3.5 million, according to the Reuters report. 

New offer levels are currently unavailable.

According to the report, some brokers are already indicating market levels of $4.5 million. 

Sentosa shipbrokers noted that several shipowners are withholding vessels for Gulf routes pending clarity on the situation.

This could lead to increased opportunities for voyages from the Far East to west of Suez and from northwest India.

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