New U.S. shipping reinsurance plan may not unblock Hormuz

The U.S. government has unveiled a $20 billion shipping reinsurance scheme for vessels passing through the Strait of Hormuz in an attempt to jump start shipping traffic and head off a global energy crisis. But with the U.S.-Israeli war on Iran still raging and oil prices spiking, experts say the physical risk to shipping remains too great to meaningfully break the logjam.

The U.S. International Development Finance Corporation (DFC) announced on Friday a $20 billion plan to offer reinsurance against losses for tankers at risk from the war. “We are confident that our reinsurance plan will get oil, gasoline, LNG, jet fuel, and fertilizer through the Strait of Hormuz and flowing again to the world,” said DFC CEO Ben Black.

Ahead of the details, research from JPMorgan suggested the DFC had access to just $154 bn of the $352 bn needed to underwrite the 329 oil vessels in the region, wrote the FT.

However, it’s not clear if the daily convoy of ships that need to transit the Strait of Hormuz will return to normal levels until the war is resolved or if the U.S. military can somehow ensure the physical safety of the tankers.

The U.S. war has destroyed much of Iran’s naval assets, but Iran retains an arsenal of low-cost drones and rockets that could threaten shipping. 

“Insurance doesn’t make the hull impervious to rockets,” shipbroker Odin head petroleum and tanker analyst Alpman Ilker told Argus on March 4th. “Insurance may incentivize a few to start transiting but the Iranians will likely attack and then traffic will again cease transit.”

The threats are not theoretical. On Wednesday, an oil tanker off the coast of Iraq suffered an explosion after a small boat approached. Oil was spotted in the water, according to a notice published by the UK Maritime Trade Operations Centre. The tanker has taken on water.

As of Wednesday, at least eight tankers have been attacked.

“To be blunt, shoring up insurance gaps may not be enough to persuade sea captains, shipowners, operators and offtakers to bear risks associated with sailing through an active combat zone,” ClearView Energy Partners wrote in a March 4^th note to clients, reacting to Trump’s initial announcement to provide shipping insurance. “In theory, U.S. naval escorts could protect against such attacks, but a drone barrage could potentially outstrip American defensive measures.”

Markets finally started to wake up to the possible scenario that the massive disruption to energy flows may not be immediately resolved. WTI and Brent prices surpassed $90 per barrel.

Tanker rates started soaring earlier last week. As of Wednesday, rates for tankers shipping crude from the U.S. Gulf Coast to China jumped to $29 million, twice as high as it cost two weeks earlier, according to Bloomberg. That equates to $14.50 per barrel of oil shipped, a staggering one-fifth of the cost of the oil itself.

Spot markets for LNG are exhibiting extreme volatility. About a week into the war, there were some signs that LNG tankers originally destined for Europe were instead rerouting to Asia to chase higher prices. Two tankers from Venture Global’s Plaquemines LNG plant in Louisiana on the U.S. Gulf Coast changed direction during their voyage. After initially sailing across the Atlantic towards Europe, they pivoted toward the South Atlantic, heading around Africa towards Asia, according to Reuters. A third tanker from Nigeria, after first setting out for Europe, followed the same journey.

These are early signs that Asia and Europe will be competing for suddenly scarce LNG cargoes, and the bidding war will drive up costs for consumers around the world.

Bangladesh paid as much as $28/MMBtu for a single LNG cargo, according to Reuters, a price nearly three times higher than pre-war levels from a week earlier.

The Trump administration has stated that it would provide a military escort through the Strait of Hormuz if necessary. But naval officials have also quietly told shipping industry officials that this may not be possible in the short run. The U.S. Navy does not have enough warships to conduct a large-scale escort operation.

U.S. military officials told the Wall Street Journal that it could take “weeks or months” to sufficiently destroy Iranian military capacity to ensure that ships can resume routine shipping traffic. And that was under optimistic scenarios.

However, the world will suffer its worst energy crisis in memory if the Strait of Hormuz drags on for much longer, let alone weeks or months.

Energy disruption quickly reaching crisis levels

Investor concerns around a supply crunch pushed Brent crude to above $100 a barrel — its highest level in four years — over the weekend, triggering a stock market sell-off. Brent crude jumped by as much as 29% to $119.50 a barrel in early trading on Monday.

However on Friday Trump stated that there would be no deal with Iran, only “unconditional surrender.” To be sure, Trump often pivots unexpectedly, waffling or backtracking on forceful policy declarations when he encounters resistance. It is conceivable that he seeks a quick end to the military campaign. But it’s no longer clear that the U.S. has control over the timing of the cessation of the war.

With each passing day, anxiety and urgency from global leaders has ratcheted higher.

All Persian Gulf energy producers will have to shut down exports and declare force majeure within the next few days if the blockage of the Strait continues, Qatar’s Energy Minister Saad al-Kaabi told the Financial Times. Qatar shut down its massive Ras Laffan LNG plant, and restarting it can take several weeks, so disruptions through March at least are now a certainty.

“Everybody that has not called for force majeure we expect will do so in the next few days that this continues. All exporters in the Gulf region will have to call force majeure,” Kaabi said. “If they don’t, they are at some point going to pay the liability for that legally, and that’s their choice.”

As of March 6^th, there were only nine very large crude carriers (VLCCs) that were empty inside the Persian Gulf, meaning that oil production in the region is running out of storage. Dwindling storage will result in abrupt production cuts. Iraq and Kuwait announced steep cuts in oil production.

Kaabi warned that ongoing blockage of the Strait of Hormuz could “bring down the economies of the world.” He added that the enormous $30 billion expansion of the North Field gas field is likely to be delayed.

China has pressed Iran to allow shipping through Hormuz, but a week into the war, tanker traffic remains at a standstill.

The disruptions are forcing oil exporters to turn to smaller tankers. Instead of VLCCs, which can carry up to 2 million barrels, bookings for Aframax tankers are on the rise, Bloomberg reports. These tankers can only hold about 700,000 barrels and are more expensive on a per-barrel basis.

It remains unclear whether the U.S. plan to provide reinsurance will help relieve pressure on the Strait.

“[M]ost shippers are in a wait-and-see mode while physical risks in the [Strait of Hormuz] are high.” Goldman Sachs analysts wrote in a note to clients on March 6^th.

“We now also think it’s likely that oil prices, especially for refined products, would exceed the 2008 and 2022 peaks, if [Strait of Hormuz] flows were to remain depressed throughout March.”

(Writing by Nick Cunningham; editing by Sophie Davies)