Gulf producers pay $40 million per tanker run through Hormuz

Summary

• Gulf producers are paying up to $40 million for a round-trip oil run through Hormuz.
• Seven ships have been hit since Sept. 28, the UK Maritime Trade Operations said.
• Crude is leaving the Gulf at its fastest rate since the Iran war began.

The latest

Crude is pouring out of the Persian Gulf at the fastest rate since the Iran war began, with producers now paying $30 million to $40 million for a single round trip through the Strait of Hormuz, The Wall Street Journal reported. Shipbrokers put that at $15 to $20 a barrel before insurance. Seven vessels have been struck since Sept. 28.

Details

• The economics: Gulf producers have concluded that leaving crude stranded inside the Persian Gulf is economically worse than absorbing the freight bill and selling at thinner margins, according to the Journal. That calculation keeps the flow moving despite the strike risk, rather than any improvement in security conditions in the waterway.
• The shuttle run: Producers are hiring very large crude carriers for a journey the industry calls a shuttle run: the tanker enters the Gulf through Hormuz, loads at a port inside, exits the strait, then transfers its cargo to a second vessel waiting outside. Each trip spans several days.
• The attacks: The UK Maritime Trade Operations, affiliated with Britain's Royal Navy, recorded seven ships hit since Sept. 28, an uptick that threatens the flow even as volumes rise. UKMTO did not identify the vessels struck or attribute responsibility for the strikes.
• Freight rates: Chartering an oil supertanker from the Persian Gulf to China topped $1.2 million a day in late September. On the eve of the war the same charter ran about $231,400 a day, and in early January it cost less than $40,000 a day — roughly a thirtyfold increase over nine months.
• Shipowner returns: Owners are collecting some of the strongest returns the shipping industry has recorded in decades. "For many shipowners, the current market is generating revenues at levels rarely seen in the industry's recent history," said Dimitris Maniatis, founder and chief executive of maritime-risk firm Marisks.
• Crew pay: Sailors willing to make the war-zone crossing — many from India, the Philippines and China — are being offered two to three times their normal monthly salary. One Shandong-based ship-staffing company is advertising as much as $25,000 for a single round trip, according to recruitment ads reviewed by the Journal.
• What that buys: For oilers and cadets, the lowest-paid ranks aboard a crude carrier, a $25,000 payout for one multiday voyage can exceed a full year of wages. The recruitment drive is concentrated on crews from countries that supply much of the global merchant marine workforce.
• Insurance gap: The $15 to $20 per barrel shipping cost cited by brokers excludes insurance, meaning the true delivered cost of Gulf crude moving through Hormuz runs higher than the headline freight figure. Underwriting terms for war-risk cover on these transits were not detailed.

Background

The Strait of Hormuz is the only sea route out of the Persian Gulf and carries a large share of seaborne crude. Iranian threats against shipping there have persisted since the war began, pushing producers toward transfer-at-sea arrangements rather than direct long-haul sailings.

Between the lines

The pricing tells the story the volumes hide. A charter rate that moved from under $40,000 a day in January to above $1.2 million in late September is the market pricing the chance a vessel is hit, not a shortage of ships. With seven vessels struck, producers and owners are each accepting that risk for different reasons: one to avoid stranded barrels, the other for returns unseen in decades.

What's next

Watch the UKMTO incident count, whether supertanker day rates on the Gulf-to-China route hold above $1 million, and whether war-risk underwriters tighten or withdraw cover for Hormuz transits.

Source: The Wall Street Journal