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EnergyMaritimeNewsOcean shipping

Hormuz ‘clock’ ticks another minute closer to midnight

Iran’s seizure of the tanker Stena Impero on July 19 has brought tensions in the vicinity of the all-important Strait of Hormuz to dangerous levels.

As of July 20, the vessel and its crew remained in Iranian custody. The oil and chemical tanker is owned by Sweden’s Stena Bulk and managed through Stena’s U.K.-based subsidiary Northern Marine Group. 

The British government released a statement warning that there will be “serious consequences” if the Stena Impero situation is not resolved, and further warned all U.K. ships “to stay out of the area for an interim period.”

Security threats to tankers – and the more serious threat of an actual closure of the strait – have major implications for global energy markets.

The Energy Information Administration has estimated that about 30 percent of the crude oil transported by sea (and about 18 percent of all global crude trade), as well as almost a third of the world’s liquified natural gas, transit the strait. In addition, around half of the world’s liquefied petroleum gas supply emanates from the Middle East.

Potential consequences of strait closure

The Strait of Hormuz connects the Persian Gulf to the Gulf of Oman. Bordered by Iran to the north and Oman to the south, the strait is only 21 miles wide at its narrowest point, with one inbound and one outbound shipping lane – each two miles wide.

Map courtesy of Shutterstock

For ocean shipping, current tensions and the potential for more serious disruptions ahead can have a short-term positive effect on rates. Shippers must pay vessel operators a premium to load cargo in the region due to higher insurance premiums, and shippers are also pre-emptively seeking alternative supplies from sources further afield such as the U.S. If oil is shipped further a distance, it reduces effective vessel capacity, a positive for rates.

However, if the strait were to be closed to maritime traffic, that would sharply reduce volumes of cargo at sea, which would have extremely negative consequences on rates.

Apostolos Rompopoulos, a tanker chartering broker at Athens-based Intermodal Research & Valuations, addressed the potential consequences in his company’s latest weekly market report.

“The optimistic scenario is for the Strait of Hormuz to be closed for only a few days,” he said. “The impact on global oil supplies would be minimal; however, we would still probably see a brief spike due to the initial uncertainty surrounding its outcome. Crude prices would possibly fall back to pre-crisis levels. The capacity of pipelines in the United Arab Emirates and Saudi Arabia should be effective in bypassing the strait.”

“The pessimistic scenario is for the Strait of Hormuz to be fully closed for the first 45 days, and a straight-line resumption in oil traffic over the next 45 days,” he continued. He said that this scenario “will lead to historically high oil prices on an inflation-adjusted basis for an extended period.”

Rompopoulos dubbed the third scenario ‘the doomsday scenario.’ In this case, he said, the strait would be closed for three months. “We cannot even imagine how high crude oil prices would go and would not begin to fall back until the global economy collapses into deep recession.”

Timeline of incidents

The Stena Impero seizure is the latest in a string of incidents. Following is a timeline of events:

May 12 – Four tankers are sabotaged off the coast of Fujairah, UAE: the Amjad and Al Marzoqah, crude tankers operated by Saudi Arabia’s Bahri; the crude tanker Andrea Victory, operated by Thome; and the bunker barge A Michel. The U.S. government subsequently claims the attacks were conducted using limpet mines and alleges that the Iranian Revolutionary Guard is to blame.

June 13 – The fully laden product tanker Front Altair, owned by Frontline (NYSE: FRO), and the chemical tanker Kokuka Courageous, operated by Bernhard Schulte, are attacked in the Gulf of Oman, 70 nautical miles off the coast of Fujairah, UAE. 

Front Altair on fire

June 20 – A U.S. drone is downed by Iran, which claims the drone had entered its airspace.

July 4 – British authorities seize the fully laden tanker Grace 1 off Gibraltar, alleging that the vessel was bound for Syria and was in violation of EU sanctions. The UAE-operated vessel was carrying Iranian crude. An Iranian government advisor subsequently warns that a British tanker could be seized if the Grace 1 is not released.

July 10 – The U.K.-flagged tanker British Heritage is reportedly approached by three Iranian ships in the Strait of Hormuz. The Royal Navy frigate HMS Montrose intervenes and the British Heritage continues on its course.

June 17 – In an interview with Bloomberg, Iran’s foreign minister claims his country doesn’t want to close the Strait of Hormuz, but “we certainly have the ability to do it.”

June 18 – The U.S. government claims it shot down an Iranian drone.

June 19 – Iranian authorities seize the Stena Impero. A second tanker, the Mesdar, operated by Norbulk Shipping UK, is briefly detained and then released.

June 20 – The British government warns of serious consequences if the Stena Impero is not released. 

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Greg Miller, Senior Editor

Greg Miller covers maritime and finance for FreightWaves. He took a circuitous route to get here: After graduating Cornell University, he fled upstate New York's harsh winters for the island of St. Thomas, where he rose to editor-in-chief of the Virgin Islands Business Journal. In the aftermath of Hurricane Marilyn, he escaped the tropics for the safety of New York City, where he served as senior editor of Cruise Industry News. He then spent 15 years at the shipping magazine Fairplay in various senior roles, including managing editor. He currently resides in Manhattan with his wife and two Shi Tzus.

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