Shipping has again been at the “frontline” of geopolitical events, with a >90% drop in vessels transiting the Strait of Hormuz, attacks on vessels and ports, damage to energy infrastructure and highly volatile charter markets. After a dramatic week, we try to take stock of developments, assess initial impacts on shipping markets (an all-time high Clarksea Index) and potential scenarios ahead.

Pre-Conflict Context

This time last week, 30% of seaborne oil trade (~20m bpd, 20% global oil supply), 30% of seaborne LPG trade and 20% of LNG were flowing through the vital, but strategically vulnerable, Strait of Hormuz. Alongside these critical energy flows, 3% of the world’s seaborne dry bulk and container trade were also involved in the ~150 typical ship transits per day. And while there were ~3,200 vessels located inside the Gulf, excluding locally operating vessels such as offshore boats there were ~1,100 ships (2% of global GT, value of $30bn, 8% of VLCCs, 6 cruise ships). Key shipping infrastructure in the Gulf includes major oil export facilities at Ras Tanura, Basra and Mina Al Ahmadi, the world’s largest LNG terminal, Ras Laffan and the Jebel Ali container hub.

Energy Impacts

As the conflict escalated, Iranian threats and attacks (on ~15 vessels to date, see briefing) quickly led to a sharp drop in Strait of Hormuz traffic (down >90%). This interruption to energy supply (and a range of incidents at energy infrastructure, including ports, refineries, LNG and oil production outages, suspension of some pipeline flows), moved global energy markets. Prices have been increasing across the week and by Friday Brent stood at >$90/bbl, up “only” 25%, with stronger gains in refined products pricing (e.g. European jet fuel up ~80%) and natural gas (Europe up 60% albeit 80% lower than 2022). Alternative energy supply channels are being explored where feasible – Saudi Arabia is raising oil flows through its East-West pipeline to the Red Sea (we are tracking ~15 VLCCs with a Yanbu recorded destination, treble typical levels) – albeit the ability to replace ‘trapped’ energy volumes with increased output elsewhere in the world has its limitations (e.g. the US is allowing India to import Russian “oil on the water”, China unlikely to export from its reserves, limited near-term upside to US LNG exports). The duration of disruption will be key to energy (and shipping) markets. Reports suggest some Gulf producers are days or weeks from halting oil output (storage constraints), risking supply shortages on downstream activity and inflation in the world economy. However, US vessel convoys or political / military resolutions are also feasible, and energy markets had seemed to be pricing in “weeks” not “months” of the current severity of energy supply disruption.

Shipping Market Moves

Impacts in some shipping markets have been equally dramatic. In energy shipping, already “hot” VLCC markets jumped to all-time highs (our “theoretical” AG-East spot earnings are $480,000/day), with strong markets spreading regionally (VLCC earnings ex-USG / WAF >$220,000/day) and into product tankers. LNG carrier spot rates have surged x5 to $200,000/day. In other markets impacts seem regional rather than global for now, with bulker average earnings softer and Far East-Europe container freight up “only” +2%. Containership service schedules have though been disrupted, with supply chain risk and congestion building, and, with the postponement of a return to Suez transits also supportive, there is an increasing near-term futures curve (albeit still well below Covid levels). Alongside huge operational risk and stress, shipping markets are seeing “disruption upside” for the moment (ClarkSea: $53,319/day), albeit in dynamic and complex markets (persistent “lost” volumes may also trigger market pressures eventually). We will continue to closely monitor developments.

Source: By Stephen Gordon, Clarksons Research