Here we go folks, the wish of so many: Pres. Trump threatens to lessen US security role in Strait of Hormuz, unveils sanctions

Pres. Trump threatens to lessen US security role in Strait of Hormuz, unveils sanctions

In tweet, Trump signals change to 40-year-old maritime security doctrine

Analyst sees move as a negotiating tactic amid heightened US-Iran tensions

US unveils new sanctions on Iranian leaders following attacks on drone, tankers

 

President Donald Trump signaled Monday that the US may lessen its role in the Strait of Hormuz as domestic oil and gas output grows and US energy imports from the Middle East decline.

"China gets 91% of its Oil from the Straight [sic], Japan 62%, & many other countries likewise," Trump wrote in a pair of tweets Monday. "So why are we protecting the shipping lanes for other countries (many years) for zero compensation. All of these countries should be protecting their own ships on what has always been....a dangerous journey. We don't even need to be there in that the US has just become (by far) the largest producer of Energy anywhere in the world!"

Trump's tweets indicated a weakening of a nearly 40-year-old US policy to defend national interests in the Persian Gulf at a time when key administration officials and allies have been attempting to reassure allies of the US commitment to safe transport of energy through the Strait of Hormuz as tensions increase between the US and Iran.

"I don't think it's a full doctrinal change, but I think it's a partial one," Scott Modell, Rapidan Energy Group's managing director and head of geopolitical risk service, told S&P Global Platts Monday.

Modell said Trump's tweets were likely a tactic aimed at bringing Iran to the negotiating table, or at least pausing military escalation between the two nations.

US Secretary of State Mike Pompeo met Monday with Saudi King Salman and Crown Prince Mohammed bin Salman to discuss the regional tensions and the "need for stronger maritime security to promote freedom of navigation in the Strait of Hormuz," the State Department said in a statement. Pompeo is traveling to Saudi Arabia, the UAE, India, Japan and South Korea this week, part of an effort to build a coalition against Iran.

The governments of Saudi Arabia, UAE, the UK and the US issued a joint statement Monday calling on Iran to "halt any further actions which threaten regional stability, and urge diplomatic solutions to de-escalate tensions.

"These attacks threaten the international waterways that we all rely on for shipping," the governments said, according to a statement released by the US State Department. "Ships and their crews must be allowed to pass through international waters safely."

In a tweet Monday, Senator Lindsey Graham, Republican-South Carolina, wrote that "safe navigation of sea lanes -- vital to a world economy -- is always in America's national security interest."

Last week, however, Air Force General Paul Selva, vice chairman of the Joint Chiefs of Staff, told reporters that while the US has defended freedom of navigation through the Strait of Hormuz for decades, maritime security was not "a US-only problem."

"If we take this on as a US-only responsibility, nations that benefit from that movement of oil through the Persian Gulf are bearing little or no responsibility for the economic benefit they gain from the movement of that oil," Selva said, according to a Defense News report.

In a tweet Monday, Javad Zarif, Iran foreign minister, wrote that Trump is "100% right that the US military has no business in the Persian Gulf."

About 20.7 million b/d of oil, or about 21% of global petroleum liquids demand, flows through the Strait of Hormuz each day, according to the US Energy Information Administration.

"Flows through the Strait of Hormuz in 2018 made up about one-third of total global seaborne traded oil," EIA said in a recent report. "More than one-quarter of global liquefied natural gas trade also transited the Strait of Hormuz in 2018."

It is unclear on what data Trump based his tweet claiming that China got 91% of its oil from the Strait of Hormuz. From January through April, China imported less than 44% of its crude oil from the Middle East, according to China's General Administration of Customs.

Still, US imports of Middle Eastern crude have reached historic lows as US oil output continues to shatter records, data shows.

US oil imports of crude oil from Persian Gulf countries averaged less than 1.05 million b/d in March, down from a peak of nearly 3.08 million b/d in April 2003, according to the US EIA. US oil output grew to over 11.9 million b/d from about 5.73 million b/d over the same time period, according to EIA data.

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MORE SANCTIONS

The US, which reimposed oil sanctions on Iran in November, allowed sanctions waivers given to Iran's biggest crude and condensate buyers to expire in early May.

Iranian crude oil and condensate exports, which averaged about 1.7 million b/d in March, fell to about 1 million b/d in April and an estimated 800,0000 b/d in May, according to  trade flow software, and shipping sources. The majority of those flows in May were to China, Turkey and Syria, according to these sources.

Modell with Rapidan said he expects the Trump administration, which has sanctioned all oil exports out of Iran with a stated aim of pushing Iran exports to zero, would need to formally allow about 1.2 million b/d of oil exports out of Iran for nuclear talks between the two sides to commence.

The US Department of the Treasury on Monday sanctioned Iranian Supreme Leader Ayatollah Ali Khamenei and eight senior Islamic Revolutionary Guards Corps commanders, freezing any US assets they hold and blocking them from the US financial system. Any foreign financial institutions that knowingly facilitate significant financial transactions with them could also be cut off from the US banking system.

Treasury Secretary Steven Mnuchin said the additional sanctions would be "highly effective" at increasing pressure on Iran. He said he did not consult European or other allies about the new measures.

Mnuchin declined to say whether last week's shooting down of an unarmed drone over the Gulf of Oman or recent oil tanker attacks triggered the latest sanctions.

"Some of this was in the works; some of this was in response to recent activities," he said during a White House briefing.

Trump tweeted Friday that the US had prepared a strike against Iran Thursday night, but he had called it off with 10 minutes to spare.

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1, 2, 3, 4, ..................... let the whining begin :D;)

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1 minute ago, ceo_energemsier said:

1, 2, 3, 4, ..................... let the whining begin :D;)

🐑🏆🤔😎.... Should have happened in 1991 with the end of Cold war and end of Gulf Oil war 1.  Especially true after WTO was signed and most nations.... never adhered to the treaty, but follow through is never a human consistent trait unless in the face of imminent DOOM and Destruction. 

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Middle East and US at the Forefront of Rates Moving Forward

With geopolitical factors coming into play in the tanker market once more, ship owners are anxiously looking for ways to trade their assets. Rates could be headed higher on the Middle East market, but much of this rise isn’t finding its way back to ship owners’ “pockets”, since it’s mostly down to increased insurance costs. In a recent note, shipbroker Banchero Costa said that “nearly one month after the attack to four tanker vessels in the Strait of Hormuz, two tankers were hit in the Gulf of Oman while transiting waters near to Fujairah on Thursday 13 morning. With regard to the critical relevance of the Middle East Gulf (MEG) for the shipping sector, below we trace last year MEG crude oil numbers in terms of oil reserves, productions and exports, retrieved from the latest OPEC Annual Statistical Bulletin. According to OPEC, the Middle Eastern countries accounted for 54 percent of global proven oil reserves and over 34 percent of global crude production in 2018 – making the MEG the largest crude producing region globally”.

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The shipbroker added that “looking at crude oil reserves in the MEG, Saudi Arabia holds 33 percent, followed by Iran and Iraq with an additional 19 percent and 18 percent respectively. In terms of output, the countries produced in total approximately 26.61 million barrels per day (bpd) in 2016; over the next two years and mainly as a result of OPEC decisions to cut production at the end of 2016 and then set new levels by mid-2018, yearly output dropped to around 25.69 million bpd in 2017 and reached around 25.74 million bpd in 2018. Thanks to a crude oil production of around 10.32 million bpd in 2018, Saudi Arabia is by far the largest producer in the region – accounting for 40 percent of the total, before Iraq (4.41 mln bpd – 17 percent), Iran (3.55 mln bpd – 14 percent), UAE (3.01 mln bpd – 12 percent) and Kuwait (2.74 mln bpd – 11 percent). As already mentioned in our previous weekly report comment, Middle Eastern countries dominated the list of 10 top global crude oil exporter in 2018 that shows Saudi Arabia leading with around 7.37 mln bpd, Iraq in third place with 3.86 mln bpd), and then UAE (2.30 mln bpd), Kuwait (2.05 mln bpd) and Iran (1.85 mln bpd) in the 5th, 6th and 9th place respectively. In terms of regions, the Middle East accounted for around 42 percent of global exports, while the next largest exporting region was Eastern Europe and Eurasia (mainly Russia) accounting for 16 percent, as well as Africa (14 percent)”, Banchero Costa concluded.

 

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Meanwhile, in a separate note of interest to tanker owners, Banchero Costa commented on US crude oil exports and their potential as a “driver” of freight rates. The shipbroker noted that “for over 40 years, due to the Energy Policy and Conservation Act, the US had effectively a ban on crude oil exports, save for very low amounts towards Canada, and has heavily depended on imports. But as President Barak Obama lifted the ban in late 2015, U.S. crude oil sector have changed since. U.S. crude oil exports have soared in the past few years, boosted by the surge in domestic crude oil production and by a number of factors including changes in U.S. midstream assets – which led to a flip in crude oil flows as old and new pipelines have been reversed to ship crude to the U.S. Gulf – and by investments in export facilities like the Louisiana Offshore Oil Port (LOOP), modified in early 2018 and become the sole U.S. facilitate to accept fully-laden VLCCs”.

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The shipbroker added that “in 2018, according to OPEC’s 2019 Annual Statistical Bulletin, the U.S. became the seventh largest crude oil exporter country, with an annual average of 2 mln bpd, almost double the 2017 volumes. The ranking shows Saudi Arabia in first place with around 7.4 mln bpd, followed by Russia (5.1 mln bpd), Iraq (3.9 mln bpd), Canada (3.2 mln bpd), UAE (2.3 mln bpd), and Kuwait (2.1 mln bpd) before the States. According to U.S. Energy Information Administration (EIA), more than 90 percent of crude oil exported from the U.S. in 2018 was shipped from the U.S. Gulf Coast. China used to be the second largest buyer of U.S. crude oil, after Canada. But last year, following the Sino-American trade war, U.S. crude oil exports to China dropped to zero from August to October, while in the first quarter of 2019, overall U.S. exports to China represented around 5 percent of total volumes – down from the 23 percent share recorded in the same period of 2018. In the first 3 months of 2019, Canada was the leading U.S. crude oil exports destination, amounting of 17 percent of total exports, before Korea (13 percent), Netherlands (11 percent) and India (10 percent). Otherwise, in 2018 and for the second consecutive year, the U.S. ranked still as the second-larger global importer averaging around 7.7 mln bpd, after China, leading with 9.3 mln bpd, as OPEC’s 2019 Statistical Bulletin data shows”, Banchero Costa concluded.

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Oil Tanker Insurance Costs to Jump After Gulf Attacks

Oil tanker owners are turning increasingly nervous about loading cargoes from the world’s largest export region for crude after the latest round of attacks on vessels.

Both owners and the companies that charter their ships paused bookings on Thursday as they re-evaluated risks to shipping barrels from the Middle East in the wake of attacks on two more tankers just a month after similar incidents. Insurance costs from the region are soaring.

The U.S. pointed the finger at Iran for the attacks just outside the Strait of Hormuz, a vital corridor for crude oil exports. The Persian Gulf country immediately denied being responsible. Nevertheless, six tankers, hauling a variety of cargoes, have now been targeted in the space of just 32 days — the kind of threat to merchant shipping that hasn’t been seen in the region for decades.

“We need to remember that some 30% of the world’s crude oil passes through the Straits,” said Paolo d’Amico, chairman of Intertanko, the biggest trade group for tanker owners. “If the waters are becoming unsafe, the supply to the entire Western world could be at risk.”

The Joint War Committee, a group that advises insurers, designated the entire Persian Gulf and waters just outside it a so-called Listed Area after the incidents a month ago. The classification gives underwriters room to charge more. As of Thursday, owners were reluctant to send vessels to the region while there was also a dearth of cargoes, according to traders and shipbrokers involved in that market, who spoke on condition of anonymity.

The cost of war risk premiums has surged to at least $185,000 for supertankers going to the Persian Gulf, according to people with knowledge of the market. They rose to $50,000 after the attacks a month ago.

DNK, the mutual insurer that covered one of the ships damaged Thursday, will increase its rates for war insurance, according to a person familiar with the matter. Rival insurer Hellenic War Risks Club will probably increase a so-called additional premium that owners pay when sailing to the Persian Gulf with immediate effect, according to a notice on its website.

DNK insured the Norwegian-owned Front Altair for the full value of the vessel, according to the person familiar with the matter. A ship of that tanker’s size is worth between $30 million and $50 million, according to another person with knowledge of the matter. Insurers provide war policies that pay out the value of ships damaged or destroyed by acts of both terrorism and war. The Front Altair’s cargo of naphtha would be insured under a separate policy.

Industry Response

Some owners appear to be “taking a breather” when it comes to accepting charters from the Middle East while they evaluate the risks of lifting oil from the region, according to Halvor Ellefsen, a shipbroker at Fearnleys in London.

Shipping companies should consider diverting vessels from the area where the two vessels were attacked Thursday, industry group BIMCO, the largest international shipping association for owners, said in a security advisory to its members. Tensions in the Strait and the Gulf are now at the highest they can be without an actual armed conflict, the group said in a separate statement.

Japan’s Mitsui OSK Lines Ltd. has ordered ships it operates in the area to keep a 12-mile radius from the zone where the two tankers were attacked, a company spokesman said on Thursday evening.

Intertanko said it is “extremely worried” about the safety of crews in the region. It also said two of its members suffered explosions at or below the water line in what the group described as an attack.

The crew of the Front Altair was forced to board an Iranian vessel and then taken to Iran, according to a report from DNK seen by Bloomberg. Despite having already been picked up by a merchant ship nearby, Iran’s navy “demanded that the crew were transferred to them,” the report said.

Rare Disruptions

Escalations that materially disrupt Middle East oil supplies are relatively rare. The Iran-Iraq war coincided with a big slump in OPEC oil output in the first half of the 1980s. That conflict saw tankers destroyed as the two countries tried to damage one another’s economies.

By contrast, Iraq’s 1990 invasion of Kuwait, and the Gulf War that followed, were a long way from Hormuz and had a relatively small impact on flows through the Strait, with Saudi Arabia replacing much of the lost Iraqi and Kuwaiti crude.

In the short-term the rates for chartering ships in the Middle East could rise as some owners consider avoiding the region, lowering supply, JPMorgan Chase & Co. analyst Noah Parquette wrote in a report.

Shares of tanker companies responded bullishly, suggesting a view among some investors that the tensions could drive up freight rates. Frontline Ltd. — the owner of the Front Altair — led the way, rallying as much as 11% in Oslo on Thursday.
Source: Bloomberg

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Gulf of Oman oil tanker attacks fuel maritime security demand

 

 

The demand for private maritime security personnel has shot up since the attacks on oil tankers in the Gulf of Oman on June 13, as shippers step up efforts to protect their ships and keep global trade going.

The US has blamed Iran for the attacks, which took place near the Strait of Hormuz, which is used to transport a third of the world’s seaborne crude. Iran has denied the accusations.

DW spoke to Dimitris Maniatis, chief commercial officer of Diaplous, one of the largest private maritime security firms, to get a sense of how the industry is responding to the latest crisis in the region.

DW: How have the recent events in the Middle East impacted demand for sec

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Image credit: DW

urity in the region?

Dimitris Maniatis: After the May 12 attacks on the four tankers anchored off Fujairah, we saw an increased concern from the international maritime community about the safety and security of their vessels in the region. However, after the attack on June 13 in the Gulf of Oman, there has been an intensification of the interests of all the stakeholders in the maritime industry for the security of their crews and vessels. We’ve have seen about a 12% to 17% rise in the actual requests that we receive for security in that particular region.

The locations where the June 13 attacks took place are not within the designated high-risk area of the Indian Ocean. So we cannot operate with weapons in those areas. Now, the concern from vessel operators is for ships going into the Persian Gulf, trading within the Persian Gulf, and then exiting the Persian Gulf. So if we are to provide security services to those vessels we cannot embark weapons, which can only exist where there is a mandate for an armed response.

DW: So what’s your strategy?

Dimitris Maniatis: What we have devised is an unarmed security service. These three-to-four member teams will assist the crew in order to prepare the vessel for this voyage with additional passive security measures and additional training to the crew in order to mitigate this risk. So looking at the way all these incidents took place, we feel there are very effective measures that you can take without the use of weapons in order to protect those vessels.

 

DW: Could you please elaborate on some of those measures?

Dimitris Maniatis: Ships are big and go quite fast. They can do a lot of different things in order to evade anything that’s incoming. We don’t believe that the June 13 attacks were done with projectiles such as missiles or torpedoes or anything like that. We believe that earlier in the night, under the cover of darkness, somebody in a small craft approached the vessel from the back and basically managed to stick an explosive — a water-borne improvised explosive device or any other explosive device — on the hull of the ship.

If the officer on watch on the ship realized that something was incoming, there would be a lot of things he could do in order to avoid the incident. However, when vessels are transiting the Strait of Hormuz, navigation is key and safety is also very important. It’s a narrow stretch of water. You cannot go left or right. You have to maintain a position within the separation scheme.

So the officer is only looking forward and only paying attention to safe navigation. If we embark an unarmed security team on board, their job is not the safe navigation of the vessel but the security of the vessel. So they will be looking where the crew can’t.

If an incoming target is identified, then the standard operating procedures are very specific. The vessel will advance to its maximum operating speed. It will perform evasive maneuvers basically causing a wake. This wake is going to make it very difficult for anybody who’s trying to approach the hull of the vessel. All lights will be switched on. Other parts of security measures such as the fire hoses will be activated. So there’s going to be a water curtain. There are going to be flares fired at the incoming craft. So it’s not going to be easy at all. And if by any chance that small craft manages to come alongside and place something on the vessel then we know it’s there. So the naval forces in the region will be immediately notified and there’s gonna be an adequate response.

DW: Do you expect the demand to hold up or even increase amid the ongoing tension in the region?

Dimitris Maniatis: I don’t think that this is going to set a standard, a new standard of sorts. What we see from our long experience in this industry is that when there is an incident there is a spike of interest and concern which fades out as the weeks go by.

DW: How well-equipped are firms like yours to meet the increased demand?

Dimitris Maniatis: We feel with the way our SOPs [standard operating procedures] are designed and our response methods are implemented, any vessel that we protect is going to be 100% safe from harm. However, if we’re talking about state actors and a sudden full-fledged attack on the Iranians or the Saudis or the Americans, anybody who wants to close the Strait of Hormuz for geopolitical reasons, there’s very little that we can do. We are not an army. We are not a country. We are a private maritime security company. So a four-man team cannot fight against an organized tactical force like the Iran’s Revolutionary Guard for example. So if it goes full fledged, there’s pretty much nothing we can do.

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The US Department of Defense released this picture of composite material, which it said was left behind following the removal of an unexploded limpet mine. Image credit: U.S. Departnment of Defence via AP

DW: What are the shipping companies most worried about?

Dimitris Maniatis: It’s the type of attack that we saw on June 13 when somebody placed explosives on the side of that vessel. And of course, everybody has the fear of a full-scale war or military operations targeting Iran for example, which would highly affect trade in the region and globally.

DW: Are they considering pulling out of the region? Is that even possible given their long-term contracts with clients?

Dimitris Maniatis: This is a complicated matter and it has more to do with the insurance market.

So you have different types of vessel owners, managers, operators and tanker pools. Some of them have a larger risk appetite than others. For example, following the June 13 event, the Heidmar tanker pool, which is the most prestigious tanker pool in the world, basically stopped any vessel that belongs to the pool from going into the Persian Gulf until a further risk analysis was completed. And this is a very professional approach to the matter.

Other companies suspended operations altogether from the Persian Gulf. Companies affected by the incidents of the May 12 have suspended bunkering operations from Fujairah, which together with Singapore is among the most important fuel bunkering global positions for ships. So a lot of Singapore-based management companies entirely ceased operations in Fujairah.

Now, because of these incidents, the Gulf of Oman and the entire Persian Gulf have been characterized as high risk areas, not because of piracy but because of state-actor aggression. This means that additional isurance premiums will apply to every single vessel going into the Persian Gulf.

Ship owners are businessmen and their purpose is to make money. If their evaluation concludes that a journey is risky but at the same time lucrative. They will go ahead with it. You know, this industry does not shy away from danger. On the contrary, it will go where it’s dangerous because it’ll pay more.

DW: What does this increased demand mean for the costs of hiring security personnel? Have you increased your prices?

Dimitris Maniatis: I can only speak for my company and not for the others. Our core belief is protecting human life at sea. Our background is from the Hellenic Navy. All our personnel on the water are mostly former military and the code of ethics that we have in the company is protecting life at sea, then the vessel and then the cargo. We don’t want to profit from an unfortunate situation that the industry finds itself in. We will be charging the same amount of money that we charged last year or on May 1, before the attacks. We do not add additional charges just because the risk environment is amplified.
Source: DW

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The oil market shows it can take a punch

 

So far, this isn’t your typical oil crisis.

Previous moments of tension in the Persian Gulf region, like Iraq’s invasion of Kuwait in 1990, once caused a major kink in oil supplies, igniting spikes in prices. After all, the Gulf provides around a third of the world’s oil, and much of that crude passes through the narrow Strait of Hormuz, which has recently been a target of attacks on tankers.

But last week, the response in the oil markets to the tensions following Iran’s shooting down of a US drone has seemed muted – even to the surprise of some participants. Analysts say this could stem from profound changes that have occurred in oil markets in recent years.

Production in the United States has risen significantly. America has become an oil exporter, sharply reducing its purchases of oil from the Middle East, although that region remains the world’s largest source of oil overall.

Another change this time around – the world’s demand for oil is growing at a slower pace. One cause for this drop-off is that world economic growth is slowing, partly over concerns about the trade war between the two largest economies, the United States and China. But another, more permanent reason is the slow pivot away from fossil fuels as a source of energy.

Certainly, the tensions in the Gulf could escalate quickly. But oil markets have evolved, changing the calculus for risk in the region.

Oil prices have moved higher, although modestly, the last few days. The price for Brent crude, the international standard, has risen about 5.8 per cent since the drone was shot down, trading at about US$65 a barrel Friday morning. But the recent high was about US$72 a barrel in mid-May.

Oil tanker companies, worried about the safety of their crews, say they are concerned about operating in the area. With so much business coming from shipping oil out of the Persian Gulf, the companies would be reluctant to pull out of the region entirely.

“The general area of the Strait of Hormuz represents a real and very serious risk to shipping,” Robert Macleod, chief executive of Frontline, a tanker company based in Oslo, Norway, wrote in an email. “Ships must continue to passage the area but all precautions must be put in place.” A Frontline tanker, the Front Altair, was one of two tankers in the Gulf of Oman attacked on June 13.

Tanker charter rates have ticked up substantially over the last week, hitting about US$28,000 a day for chartering the largest class of tankers. Insurance premiums for shipping in the area have also risen. If anything, though, tanker operators have been disappointed that prices have not risen even higher – in late-2018, the operators were able to charge about US$50,000 a day.

“Rates have increased, though not as much as many had thought or even hoped for,” wrote Fearnleys, an Oslo-based ship broker, in a report published last Wednesday.

Traders may be shrugging off the threat of disruptions in the Gulf, knowing that a shortage could be made up by surging supplies from the United States.

A boom in oil and natural gas production in the United States in recent years, driven mainly by shale drilling, has shaken up world oil markets and revived the United States as a petroleum power. That trend is expected to continue.

Oil production in the United States grew by an extraordinary 17 per cent last year, and natural gas output was up by 12 per cent. In the last decade, the United States has added roughly six million barrels of oil a day, the equivalent of the combined production of the United Arab Emirates and Kuwait, two stalwarts of the Organization of the Petroleum Exporting Countries (Opec).

Canada, too, has seen its oil output surge, up 8.5 per cent last year.

The explosive growth has weakened Opec’s hold on the oil markets and cut gasoline prices sharply around the world, as supplies from the United States make their way into circulation. Under pressure, Opec and Russia have joined forces in coordinating production cuts, but they have not been able to restore prices to the US$100 a barrel levels of 2014.

Traders know that because Opec and Russia are keeping oil in the ground, there are large volumes of additional oil that could be unleashed on the market.

The oil market’s tame response so far to the threats of disruption has surprised some analysts. Others, though, point to fears about the world economy and say that signs are emerging that growth in demand for oil, which had been strong in recent years, is sharply easing.

Research firm IHS Markit concluded recently that some major markets were experiencing an actual contraction in demand for oil, “the largest such decline since the worst of the financial crisis” of 2008.

Analysts say that if a weaker global economy continues to soften the demand for oil, then relentlessly increasing supplies from the United States and elsewhere may swamp the markets.

“As long as growth held up, you could absorb all the growth of US supply,” said Roger Diwan, vice-president for energy at IHS Markit. “Now, with weaker demand, the global supply growth is going to overwhelm global demand growth,” he added.

It is important to keep in mind that there has been no actual disruption of oil flows from the Gulf region.

But a major episode might well roil the markets. Analysts say that it would be very difficult to replace a large portion of the 21 million or so barrels of oil that flow through the Strait of Hormuz on an average day.

A major disruption would likely do the most damage to Asian economies. According to the US Energy Information Administration, a government agency, 76 per cent of the crude oil that flowed out of the Persian Gulf through the Strait of Hormuz went to Asian markets like China, India and Japan.

But a cut-off in supplies would not be in the interest of any of the countries in the region, including Iran, which still exports what oil it can through the Gulf. Oil provides a vital source of revenue for many governments in the region.

The United States has shown in the past that it is willing to go to great lengths to keep the sea lanes open. In the 1980s, for instance, after dozens of ships were damaged during the conflict between Iraq and Iran, navy vessels from the United States and other countries escorted tankers through the area. This time around, the United States might seek help from other oil-importing countries like China and Japan.

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Gulf of Oman attacks: how merchant ships can keep safe in dangerous waters

The latest attacks on two oil tankers in the Gulf of Oman have once again highlighted the vulnerability of merchant ships crossing high risk areas. Both the Front Altair and the Kokuka Courageoussustained significant damage to their hullsin attacks on June 13 that led the the evacuation of the crew. This latest attack mirrors an incident from May, where four vessels, including two Saudi oil tankers also sustained ‘ significant damage ‘, according to the country’s energy minister, in a seemingly targeted attack.

Lloyds Joint War Risk Committee, which details areas of heightened insecurity for marine insurers, has recognised the ‘ perceived heightened risk across the region ‘ to shipping. It has included the Gulf of Oman in a list of areas of enhanced risk, essentially designating the waterway a warzone. The incident has also further stoked international tension amidUS claims of Iranian involvement . On June 17, the US government said it wassending approximately 1,000additional troops to the Middle East for ‘defensive purposes’.

But how can those who work at sea reduce their vulnerabilities while crossing these dangerous waters? While the specific nature of the incidents remains unclear, lessons from other regions, such as those waters at risk from Somali piracy, may help reduce the vulnerabilities and risk to shipping in the Gulf of Oman.

Protective measures
Merchant vessels must make their location and status known byliaising with the relevant authorities ashore . They must also act on the latest threat alerts and report security incidents, including suspicious behaviour and approaches to theUK Maritime Trade Operationsor theCombined Maritime Forcesoperating in the region.

International naval forces, such as the Royal Navy, may also ultimately consider escorting merchant shipping in a convoy system and deploying minesweepers to clear shipping lanes, partly mirroring counter-piracy efforts such as theInternationally Recommended Transit Corridorin the Gulf of Aden. This is, however, politically sensitive and may provide additional risk of escalation. Other measures, such as improving the watertight integrity of the hull by closing selected doors and hatches, can help reduce damage. Ensuring that crew sleeping areas are located above the waterline can also help reduce the potential for loss of life from any attack.

The shipping industry has proven adaptable and resilient in the face of other maritime security threats. Abest practice document , developed to help harden ships against the threat of Somali based piracy, has now evolved to consider other maritime threats. It contains guidance to help mitigate against specific threats emanating from regional instability, such as anti-ship missiles, sea mines and water-borne improvised explosive devices, which are essentially small motor boats laden with bombs. The suicide attackagainst the USS Cole in 2000as it was refuelling in the port of Aden was an example of such an improvised attack.

Key measures outlined in the document include increased vigilance to avoid floating objects, maintaining a VHF radio watch. It also recommends a safe muster point is designated above the waterline, instead of a citadel – a fortified safe place within the ship where crew can control communications, propulsion and steering. While citadels provided an effective means ofinterrupting a successful hijacking by pirates , merchant shipping in the Gulf of Oman is facing more sinister and elusive threats. A muster point above the waterline is better as it avoids the potential for crew being injured or killed by an explosion.

Avoiding mines
NATO offers guidance on how merchant vessels can improve safety and security in times of tension, crisis, or conflict in co-operation with naval forces. Its guidance includes a specific section on the threat from sea mines. This focuses on the different categories of sea mine alongside self-protective measures ships can take. These include avoiding waters with less than 200m depth to make it more difficult for divers to attach limpet mines, or maintaining the lowest steering speed in shallower waters to lessen the chance of a detonation. However, ships are much more vulnerable in port areas to the threat of mines. Some shipping association representatives have suggested ships could randomly operate their propellers, bow thrusters and echo sounders when in port to create a disturbance that might help prevent the placement of limpet mines.

The maritime security environment is uniquely sensitive to shocks in the international system that can arise from political tensions and spill over from conflict ashore. This directly impacts upon the shipping industry, but also indirectly affects energy security and the global supply chain. This latest attack, for example, initially caused theprice of crude oil to jump by over 2% .

Ultimately, seafarers are at the frontline of these seemingly targeted attacks along a critical node for the movement of global energy supplies. While no major loss of life, disruption of trade or environmental disaster has occurred yet, if attacks continue in a comparable manner, it’s likely to be only a matter of time.

 

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Persian Gulf clean product outflows may slow as shipowners weigh risk premiums

The volume of clean oil products flowing from the Persian Gulf into Asia could see some drops in the coming weeks as Asian traders and shipowners have become cautious about buying and loading cargoes from the region following the oil tanker attacks last week, market sources said this week.

The traders and shipowners are assessing the risk premiums and potential rise in freight costs after the attacks near the Gulf of Oman, they added.
Persian Gulf refineries typically export gasoil and jet fuel cargoes to Europe, Africa and East Asia, with naphtha cargoes mostly flowing into North Asia.

The apparent attack on two tankers has not resulted in a slowdown in chartering in the Middle East so far, several ship owners, brokers and charterers across Asia-Pacific told S&P Global Platts. However, chartering sources in Singapore noted that an additional war risk premium, or AWRP, will have to be paid by charterers if the loading is in listed areas for “hull war, piracy, terrorism and related perils”, such as the Persian Gulf.

This premium is in addition to freight and will make the delivered cost of cargoes higher.

Shipowners would have to check with their individual Protection and Indemnity Clubs, their Hull and Machinery insurers and their security teams about the risk of each charter with regards to the port of call and voyage, market sources in Singapore said.

This delays the chartering process for vessels, and owners with vessels currently on subjects have pushed all further AWRP since Friday for the charterer’s account.

“Prior to last week’s attacks, shipowners would have to pay 0.02%-0.025% of vessel value for War Risk premiums. Today we have seen owner being asked to pay numbers from 0.1%-0.4%. These numbers represent a premium payable for only the Gulf of Oman/Arabian Gulf and are payable on top of existing Gulf of Aden War Risk premiums,” said a shipbroker Tuesday. Arabian Gulf is more commonly known as the Persian Gulf.

The median range heard was 0.25% of the vessel’s value, said shipping sources.

“For an LR1 tanker, the additional cost could go from zero to $175,000–it is very different for each ship. Greek owners have inflated their hull and machinery values, some underwriters are not charging much on top,” a shipbroker said.

ASIAN BUYERS
While freight rates for moving barrels out of the Persian Gulf have not spiked, further attacks in the region, where a third of world’s seaborne oil passes through, could see current assumptions change rapidly, traders said.

Term clean product supply contracts are being executed on schedule but some trading companies and end-users are scouting for alternative sources such as China, South Korea and West Coast India for spot cargoes, Asian market and trade sources said.

Major petrochemical producers from South Korea — Asia’s top naphtha importer — including LG Chemical, KPIC, Lotte Chemical, Hanwha Total and Yeochun Naphtha Cracking Center said they will likely shift focus to consume domestic naphtha in the near term until the tensions in the Persian Gulf eases.

A source from one of the South Korean petrochemical makers said that costs to bring in naphtha and LPG from Persian Gulf suppliers will likely increase as insurance risk premiums spike, so the company would prefer to consume feedstocks domestically and from other regional Asian markets first.

“It is all going to be about [incremental] cost,” a Singapore-based trader in a Middle Eastern trading house said. “If you simply isolate the freight and FOB differentials loading cost, than either differential comes off or freight eases.”

OTHER OPTIONS FOR SELLERS
Middle Eastern refiners still have other options before reducing their FOB loading premiums, Asian traders said.

“Some refiners could potentially send their cargoes to storage or even reduce their run rates, before even considering lowering their sale price,” the Singapore-based trader in a Middle Eastern trading house said.

According to data by the Fujairah Oil Industry Zone, clean oil product stocks have been lower since mid-May, when the first attacks began.

Stocks of middle distillates in Fujairah averaged 2.095 million barrels in the first two weeks of June, down 14% for the same period in May when it stood at an average of 2.434 million barrels, data showed.

During the same period, stocks of light distillates in Fujairah declined by 6% to 9.994 million barrels in the first two weeks of June, or down from 10.617 million barrels in first half of May.

 

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Persian Gulf Fixtures Dominate “Festivities”

 

VLCC
Since last week’s attacks in the Gulf of Oman political tensions remained high, leading owners and charterers trying to determine practical ways to continue fixing in the Middle East Gulf. After a slow start, deals started emerging. Rates shifted dramatically upwards, with 270,000mt MEG/China now at W51.5/52 level up about W12 points, with 280,000mt to US Gulf basis Cape/Cape assessed W4 points higher at W22-23 region. West Africa/China increased around W10 points to W50/51 for 260,000mt, while 270,000mt USG/China is now rated at $5.8-5.9m, up $800-900k for the week.

Suezmax
West Africa suezmax rates for 130,000mt to UKC came under heavy pressure this week, losing W10 points to W70, while 135,000mt Black Sea/Med dropped W5 points to settle at W90. Owing to the Middle East tensions, 140,000mt Basrah/Med voyage rates shot up during the week to W55-57.5 region, before easing to W47.5 which still represents a rise of 12.5 points week-on-week.

Aframax
80,000mt Ceyhan/Med is now around W85, down W5 while 80,000mt Cross-North Sea eased W5 points to W87.5, and 100,000mt Baltic/UKC at low/mid W60s. Again, due to tension in the Middle East, rates there pushed up and 80,000mt AG/Singapore is now assessed at W120/122.5 level, up 12.5-15 points for the week.

Clean
MEG clean tonnage failed to apply the pressure felt on crude with rates climbing marginally over the week; 75,000mt MEG/Japan sits at W102.5/105 level, up W2.5 points, and 55,000mt AG/Japan was flat at W112.5/115 level. The best performing markets this week were in the Atlantic, with 37,000mt Cont/USAC recovering to W115-117.5 level, up about W15 points, whilst 38,000mt USG/UKC fixed at W100, up W20 points.

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Shipping experts are ‘highly worried’ about rising military tensions in the Strait of Hormuz, surging rates, and the impact on energy-dependent Asia

 

 

The cost of chartering very large oil tankers to sail through the Strait of Hormuz in the Persian Gulf may rise by as much as a third, as shipowners and charterers pass on rising insurance and fuel costs following recent tanker attacks that threaten a vital artery for global energy supplies, according to experts.

Tim Huxley, director of Mandarin Shipping, said charter rates for supertankers, could go up by as much as US$10,000 per day, lifting the current benchmark for very large crude carriers (VLCC) on the Persian Gulf to China route from its current level of US$17,739.

Bloomberg reported that oil futures climbed 5.4 per cent in New York on Thursday after Iran shot down a US military drone that Iran says was in its airspace. The US said the drone was operating in international airspace.

“It is an incredibly worrying development,” said Huxley. “There are [ship] owners already saying they don’t want to go there [The Persian Gulf]. No owner wants to put their crew at risk – there will come a point where owners don’t want to do it.”

Shipping lines were already on tenterhooks after two tankers operating in the gulf suffered mysterious explosions on June 13, one month and a day after four attacks occurred in the same region. The US blamed Iran and its regional proxies for the explosions, accusing Tehran of using limpet mines – a mine that attaches to a ship’s hull with magnets – on the tankers. Tehran has vehemently denied that it had anything to do with the attacks.

Both ships were carrying petrochemical supplies to Asia. One was bound for Taiwan, the other for Singapore.

Lloyd’s List reported on June 18 that the attacks in the Gulf of Oman “spurred monstrous volumes traded in freight futures”, with volatility pushing spot rates 19 per cent higher over the previous two days.

Both tankers in the June 13 incident were in the Gulf of Oman, just beyond the narrow Strait of Hormuz that connects the Indian Ocean to the Persian Gulf. The Strait of Hormuz waterway handles about 20 per cent of all oil production, and is the oil shipping world’s most important sea passage, with nearly 16 million barrels of oil per day transiting on tanker ships. Asia is one of the key destinations for oil passing the Persian Gulf.

Escalating tensions would also impact shipments of other energy products. Approximately 3.7 trillion cubic feet of liquefied natural gas (LNG) was transported from Qatar via the Strait of Hormuz in 2016, accounting for more than 30 per cent of global LNG trade.
Suki Basi, founder of the Russell Group, a risk management consultancy, said that as much as 75 per cent of the exports passing through the Strait of Hormuz are bound for energy markets in Asia-Pacific. Huxley estimates that Japan and South Korea source as much as 90 per cent of their oil from the Middle East. He added that China also sources much of its oil from Iran. The US Energy Information Agency describes the strait as “an important route for oil exports from Iran”.

“The attacks in the Gulf of Oman have introduced a great deal of uncertainty for shipowners operating in this area. Some shipowners have decided not to accept cargoes in the region until the situation has calmed down. The war risk insurance premiums have also gone up an estimated 10 to 15 per cent, and with the reduced supply of tankers willing to transport oil cargoes out of the Persian Gulf, freight rates are climbing. Oil prices have also jumped, and with that the cost of fuel also goes up, forcing freight rates even higher,” said Jakob Larsen, head of maritime security for BIMCO, the world’s largest shipping association.

Frontline, the owner of Front Altair, one of the vessels attacked on June 13, is now exercising “extreme caution” with regard to sending more vessels into the Persian Gulf, according to Shipping Watch.

Basi believes a 10 per cent rise in oil prices would trigger inflationary pressures in western economies. Iraq and Saudi Arabia have been looking at transporting oil by pipeline to the Red Sea and the Gulf of Aden to avoid the Persian Gulf, but access to the Gulf of Aden requires access to Yemen, which is controlled by the Houthi rebels. Saudi Arabia has been leading a military coalition of nine nations against the Houthi rebels in response to calls for military support from the ousted president of Yemen, Abdrabbuh Mansur Hadi.

“It won’t surprise me if the conflict in Yemen is escalated by attempts to pipeline more oil,” said Basi. The price of bunker fuel to power VLCCs is a bigger driver of shipping costs than freight rates and insurance, he said.

Before the attacks on June 13, oil prices were in a declining trend, pressured by concerns over slowing global economic growth and the impact of the US-China trade war.

For shipowners and charterers operating in the Persian Gulf, higher insurance premiums could become long term structural costs, even if tensions eventually decrease.

“Once the war risk premium has been put on, it takes a long time for it to come off. The shipowner and the charterer pay the additional insurance costs and you have to pay double the wages for your crew,” said Martin Cresswell, technical director at the Hong Kong Ship Owners Association.

Many analysts think an outright blockade of the Strait of Hormuz by Iran is unlikely.

“Iran is unlikely to block the Strait of Hormuz as it constitutes Tehran’s own [economic] lifeline. Most of Iran’s remaining energy exports and imports pass through the strait,” said Ali Vaez, director of the Iran Project at the Federation of American Scientists in Washington. “Tehran will only consider closing the strait if it finds itself under a full embargo with very little left to lose. But that would lead to a military conflict with the US.”

He added that a US military intervention would likely result in a reopening of the strait in a number of weeks.
Reuters reported that Iran has said it will begin to “scale back its compliance” with the 2015 nuclear agreement, which the Trump Administration unilaterally abandoned in May 2018.

Miscalculation or accidents could also trigger a conflict, according to some analysts. The June 13 attacks took place 50 minutes apart, spurring separate operations to rescue the respective crews by US and Iranian naval forces from the two stricken vessels which were just 10 nautical miles apart.

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Navy to escort Indian crude tankers sailing through Strait of Hormuz

 

 

Desh Vishal, an oil super tanker owned by the state-run Shipping Corporation of India (SCI) has become the first Indian-flagged crude carrier to allow Indian Navy personnel to board the ship while it sailed through the Strait of Hormuz — the world’s busiest transit lane for seaborne oil shipments — where two separate attacks on oil tankers recently have put crude movement from the Persian and Arabian Gulf in danger.

After a meeting in New Delhi on Friday between the Indian Navy, the Indian National Shipowners’ Association and the Director General of Shipping, it was decided that Indian-flagged crude tankers ferrying crude from the region seeing rising tensions between Iran and the United States, can make use of escort from the Indian Navy – one officer and two sailors while transiting the Strait of Hormuz.

On Saturday, Indian Navy personnel boarded and disembarked Desh Vishal while it was passing through the Strait of Hormuz. The Indian Navy will board an Indian-flagged LPG tanker owned by a private firm on Sunday on its passage through Hormuz, at least two people briefed on the development said, asking not to be named.

SCI could not be reached immediately for comment as its office was closed due to Sunday.

“The escort service has already started with Deshi Vishal. Indian Navy guards will board other ships also on a-case-to-case basis. It is an option, whoever wants can make use of this. Indian-flagged crude and petroleum product tanker owners can either allow Naval personnel to board the vessel or they can request the Navy to carry out inspection of the ship’s hull/structure. It is up to the master of the ship and the company, what they want,” a government official said.

“It is an option for the tanker owners, but we are hoping that they will all agree. The SCI vessel has already taken it. We’ll see how it progresses,” he said.

US-Iran tensions
The attack on the oil tankers is seen as a fall-out of the sanctions re-imposed by the US last year on Iran over its disputed nuclear program, choking its oil exports.

While India has virtually stopped buying crude from Iran, the Strait serves as a vital shipping route for imports from other Gulf suppliers.

Located between Oman and Iran, the Strait of Hormuz connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. It is the world’s most important oil shipping route because of the large volumes of oil that flow through the Strait.

In 2018, its daily oil flow averaged 21 million barrels per day (b/d), or the equivalent of about 21 per cent of global petroleum liquids consumption.

Also read: Strait of Hormuz: the world’s most important oil artery

Flows through the Strait of Hormuz in 2018 made up about one-third of total global seaborne traded oil.

More than one-quarter of global liquefied natural gas trade also transited the Strait of Hormuz in 2018, according to the US Energy Information Administration (EIA), a website run by the US Department of Energy.

There are limited options to bypass the Strait of Hormuz. Only Saudi Arabia and the United Arab Emirates have pipelines that can ship crude oil outside the Persian Gulf and have the additional pipeline capacity to circumvent the Strait of Hormuz.

Saudi Arabia, the world’s top oil exporter, moves the most crude oil and condensate through the Strait of Hormuz.

“EIA estimates that 76 per cent of the crude oil and condensate that moved through the Strait of Hormuz went to Asian markets in 2018. China, India, Japan, South Korea, and Singapore were the largest destinations for crude oil moving through the Strait of Hormuz to Asia, accounting for 65 per cent of all Hormuz crude oil and condensate flows in 2018,” it said on its website.
Source: The Hindu Business Line

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Strait of Hormuz tensions underscore oil market’s global scope

 

 

President Trump has claimed that turmoil in the Strait of Hormuz matters less than in decades past, now that U.S. oil production continues to grow while imports fall — a view that does not reflect the global nature of today’s oil market.

The big picture: Middle East tensions have heightened following multiple attacks against oil tankers in the Strait of Hormuz, a 2-mile shipping channel exiting the Persian Gulf through which about one-fifth of the world’s oil passes each day. Even though the majority of those shipments are bound for Asia, the interconnectedness of the global oil market means demand surges or supply disruptions in any region affect oil prices worldwide.

Context: U.S. imports from the Gulf fell to 1.5 million barrels per day last year, down from a high of 2.7 million bpd in 2001. Celebrations of U.S. energy “independence” or “dominance” aside, the U.S. is still vulnerable to swings in the global oil market.

-The risk isn’t directly to physical supply, but rather to price movements that affect business and consumers alike.
-Past oil price spikes have coincided with numerous conflicts in the Middle East where physical supplies to the U.S. were not threatened. And current instability in Libya, which produces far less oil than the Gulf countries, could spark an increase in global prices.
-While record levels of domestic production mean that U.S. producers would benefit more than in the past from high prices, the average American could still face sticker shock at the pump.

What to watch: The standoff between the U.S. and Iran escalated Wednesday when Iran shot down an American surveillance drone.

-In response, prices of Brent crude, the global benchmark, climbed more than 5% Thursday morning. Further conflict could drive prices higher still.

The bottom line: The only way to be “independent” of the oil market is to not use oil. Until then, a supply disruption anywhere is a disruption to prices everywhere.

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Crude Oil Tanker Freight Rates From The Arabian Gulf To China Double On The Back Of Tanker Attacks

 

Spot freight rates for a Very Large Crude Carrier (VLCC), carrying 2 million barrels of oil, between the Arabian Gulf and China reached USD 25,994 per day on 20 June, their highest level since March and significantly above the May average of USD 9,979 per day.

Despite this increase, freight rates on this route only narrowly exceeds the daily break-even costs of a VLCC, that on average amounts to USD 25,000 per day.

The latest attacks which happened on 13 June 2019 have further increased uncertainty which was already high following explosions on four tanker vessels off the coast of the United Arab Emirates on 12 May 2019.

ot-freight-rates.jpg

Measured against global oil demand, around a fifth of global oil consumption sails through the Strait of Hormuz, making the strait a critical chokepoint for global energy markets. Considering only seaborne transportation of crude oil, the 19.7 million barrels per day transiting the Strait of Hormuz represents 49% of the 40.5 million barrels transported in total (source: Clarksons Research).

Freight rates on one of the attacked routes remain stable

Although spot freight rates for crude oil tankers out of the Arabian Gulf have risen sharply, those for LR2 tankers carrying clean oil products like naphtha, have remained much more stable. Spot freight rates for an LR2 carrying ½ million barrels of naphtha condensate from the Middle East Gulf to Japan, rose by only 4% between 13 and 20 June 2019. The ‘Front Altair’ was sailing on this trade when it was attacked on 13 June.

Freight rates for an LR2 were down in the week of the attacks from the previous week, in stark contrast to the development in crude oil tanker earnings.

“The unchanged rates for oil product tankers compared with the jump in freight rates for crude oil tankers, illustrate the differences between the two markets as well as the effects of sentiment on crude oil freight rates,” says BIMCO’s Chief Shipping Analyst, Peter Sand.

Tanker owners continue trading ships in the Arabian Gulf

Immediately after the attacks, safety concerns led several tanker owners to question whether they would continue trading in the Arabian Gulf, there has however been no major exodus from the market.

“The vast majority of tanker owners are more or less going about with business as usual, although they have ratcheted up their safety and security precautions when trading their ships in the Arabian Gulf,” Sand says.

These additional measures include speeding up while sailing through the Strait of Hormuz, as well as avoiding sailing through it at night at which point watchkeeping becomes more difficult.

The added costs of safety measures as well as higher insurance premiums, which rose sharply following the news of the attacks mean that ship owners will not only face higher risks but also higher costs when trading in the region.

“To avoid major disruption, it is vital for global energy trade that the Strait of Hormuz remains accessible and safe for ships to sail through. As long as tensions aren’t escalated the attacks are unlikely to have a more profound effect. However, the risks that the conflict will escalate remains very present and a great worry to everyone involved with oil trading in the region,” says Sand.

BIMCO has urged all nations to do what they can to de-escalate the situation and allow ships to pass safely through the Strait of Hormuz.

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Testing times in the Gulf of Oman

Little over a month after four tankers were damaged by explosions in the Middle East’s Gulf of Oman, another two tankers have been rocked by blasts in the same area. Last week, on 13 June, the methanol-carrying, Panama-listed Kokuka Courageous and the naptha-carrying, Marshall Islands-flagged Front Altair were both travelling south-eastwards through international waters — having gone through the strategically-important Strait of Hormuz — when damaging explosions took place.

Back on 12 May, four oil tankers — the Saudi-flagged Amjad and Al Marzoqah, the Norwegian-flagged Andrea Victory and the Emirati-flagged A Michel — had been attacked near the strait while at anchor off the UAE’s Port of Fujairah, with the blasts blowing holes in the hulls of the vessels. While early findings concerning the May explosions demonstrated a great likelihood of four limpet mines having been used in the attacks, the US military has put out a video it claimed shows Iran’s Revolutionary Guard removing an unexploded mine of this sort from one of the June vessels hours following the initial explosions. There were no deaths as a result of all the explosions.

Positioning key

Location is key in all of these incidents. Both sets of explosions took place close to the Strait of Hormuz, a critical oil chokepoint. It might only have a width of 21 nautical miles at its most narrow, but the waterway sees 20% of global oil exports — nearly 19m barrels of oil daily — pass through it. Sufficiently deep and wide to cope with the biggest crude oil tankers in the world, the passage connects Middle Eastern crude oil producers to key markets across the globe. Additionally, the strait serves as the main route for Iran’s oil exports.

At the moment there is heightened tension around the waterway, with potential for Iran to block all oil leaving through the strait. Following the US’ withdrawal last year from an international nuclear deal with Iran, the two countries’ relations have been increasingly tense. Last November, US President Donald Trump made sanctions against the Middle Eastern nation tighter, and in April, he told countries that they could also face sanctions if they kept purchasing oil from Iran.

The waterway’s role as the primary route for oil exports from Iran is “a big deal” for the economy of the Western Asian nation — oil constitutes about two-thirds of Middle East exports. Iran has made it clear that it is unhappy about a ban on its oil sales, and claims that it can stop all oil exiting through the strait.

“If one day, [the US] tries to stop Iran’s oil exports, then no oil can be exported from the Persian Gulf,” Iran’s President, Hassan Rouhani, has stated.

A lack of oil route stability will lead to a rise in oil prices around the globe. “Any instability in oil routes means higher oil prices across the world, having huge effects on any industry dependent on oil,” the US military said in its video. “One tangible example could be your car’s petrol price, 70% of which is dependent on the price of crude oil.”

The shipping reaction

Following the second set of blasts, insurance rates have spiked and some captains have reportedly refused to sail in the region threatening one of the biggest disruptions to crude oil trading in the Strait of Hormuz for many years. News of the explosions triggered steep oil price hikes on the day of the incidents. Shipowners reported that after the first set of explosions, premiums had gone up by 5% to 15% depending on cargo and size.

Commenting on the attacks, BIMCO chief shipping analyst Peter Sand said: “This will likely cause shipowners and operators to ask for a premium on freight rates for trading in the area, as risk is now clear and present.”

International Maritime Organization (IMO) secretary general Kitack Lim expressed his concern over both sets of explosions during the 101st session of the body’s Maritime Safety Committee, held 5-14 June: “IMO has developed a comprehensive regime of regulation through the [International Ship and Port Facility Security] Code and the SUA Conventions and Protocols to prevent and respond to unprovoked, unlawful attacks on merchant shipping,” he noted. “The threat to ships and their crews, peaceably going about their business, is intolerable. I urge all member states to redouble their efforts to work together to find a lasting solution to ensure the safety and security of international shipping around the globe and protection of the marine environment. I will carefully review the results of the investigations, once they are completed, to consider if additional IMO action is warranted.”

The Strait of Hormuz now has a higher risk premium than any other seaborne trade route. Speaking to Wall Street Journal, Karatzas Marine Advisors chief executive Basil Karatzas said that there will be a significant rise in freight rates for crude oil tankers, adding that as insurance rates go up and vessel operating expenses grow to cover more compensation. “It could be a déjà vu of the Gulf War days in the early 1990s, when tankers in the Gulf were earning a multiple of the average market,” he said.

BIMCO is advising its members doing business in the area to exercise extreme caution and instruct their vessels to take precautions. Mr Sand advised considering telling vessels to avoid the area or to keep as far away as possible — to the extent operations permit and depending on a firm’s risk-acceptance levels.
 

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The world’s largest shipping firm has altered its route through the Strait of Hormuz amid rising tensions

A.P. Moller-Maersk has changed the route its ships sail through the world’s busiest transit lane for seaborne oil shipments, citing safety concerns amid a rapid series of escalations between the U.S. and Iran.

A surface-to-air missile shot down a U.S. military drone in international airspace over the Strait of Hormuz, a U.S. official told NBC News Thursday morning.

The reported drone downing has exacerbated fears that a major military confrontation could soon erupt between Washington and Tehran.

When asked what steps A.P. Moller-Maersk had taken to protect its assets after the latest flare-up in tensions, the chief operating officer of the world’s largest shipping company said the safety of its workforce would be the top priority.

“We are protecting our assets but, first and foremost, we are protecting and being very careful when it comes to (the) safety of our employees,” Soren Toft told CNBC’s “Squawk Box Europe” on Thursday.

“We have multiple assets, ships (and) people, crossing the Strait of Hormuz every day, every week. So far, we have not stopped serving the area (but) we have changed the path that the ships sail so we have changed the route.”

‘Much more monitoring’ in the Strait of Hormuz
The Strait of Hormuz, a narrow channel situated between the borders of Iran and Oman, accounts for approximately 30% of the world’s seaborne oil traffic. It is seen as one of the most important waterways in the world, linking crude producers in the Middle East with key markets in the rest of the world.

Attacks on two oil tankers in the Gulf of Oman last week and on four tankers off the United Arab Emirates in mid-May, both near the Strait of Hormuz, has ratcheted up concern about the prospect of a military confrontation.

The U.S. and Saudi Arabia, a regional ally to Washington, blamed Iran for the incidents. Tehran has denied responsibility.

Tensions have spiked between the U.S. and Iran since President Donald Trump’s administration withdrew from the 2015 nuclear deal and reinstated sweeping sanctions on the Islamic Republic.

“We have much more monitoring going on,” A.P. Moller-Maersk’s Toft said, before adding the firm was not “calling Iranian ports.”

“We are also in a situation where we operate a so-called bus service contrary to the tankers which is more of a taxi or a tram situation. So, we are following a specific path and so far we are serving the customers.”

 

 

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The Strait of Hormuz is the world’s most important oil transit chokepoint

 

The Strait of Hormuz, located between Oman and Iran, connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. The Strait of Hormuz is the world’s most important oil chokepoint because of the large volumes of oil that flow through the strait. In 2018, its daily oil flow averaged 21 million barrels per day (b/d), or the equivalent of about 21% of global petroleum liquids consumption.

Chokepoints are narrow channels along widely used global sea routes that are critical to global energy security. The inability of oil to transit a major chokepoint, even temporarily, can lead to substantial supply delays and higher shipping costs, resulting in higher world energy prices. Although most chokepoints can be circumvented by using other routes that add significantly to transit time, some chokepoints have no practical alternatives.

main-6.jpg

Source: U.S. Energy Information Administration and ClipperData, Inc.

Volumes of crude oil, condensate, and petroleum products transiting the Strait of Hormuz have been fairly stable since 2016, when international sanctions on Iran were lifted and Iran’s oil production and exports returned to pre-sanctions levels. Flows through the Strait of Hormuz in 2018 made up about one-third of total global seaborne traded oil. More than one-quarter of global liquefied natural gas trade also transited the Strait of Hormuz in 2018.

chart2-6.jpg

Source: U.S. Energy Information Administration, based on Short-Term Energy Outlook (June 2019), ClipperData, Saudi Aramco bond prospectus, Saudi Aramco annual reports, Saudi Ports Authority, International Group of Liquefied Natural Gas Importers, and U.N. Conference on Trade and Development
Note: LNG is liquefied natural gas; Tcf is trillion cubic feet

There are limited options to bypass the Strait of Hormuz. Only Saudi Arabia and the United Arab Emirates have pipelines that can ship crude oil outside the Persian Gulf and have the additional pipeline capacity to circumvent the Strait of Hormuz. At the end of 2018, the total available crude oil pipeline capacity from the two countries combined was estimated at 6.5 million b/d. In that year, 2.7 million b/d of crude oil moved through the pipelines, leaving about 3.8 million b/d of unused capacity that could have bypassed the strait.

chart3-3.jpg

Source: U.S. Energy Information Administration, based on ClipperData, Saudi Aramco bond prospectus (April 2019)
Note: Unused capacity is defined as pipeline capacity that is not currently used but can be readily available.

Based on tanker tracking data published by ClipperData, Saudi Arabia moves the most crude oil and condensate through the Strait of Hormuz, most of which is exported to other countries (less than 0.5 million b/d transited the strait in 2018 from Saudi ports in the Persian Gulf to Saudi ports in the Red Sea).

EIA estimates that 76% of the crude oil and condensate that moved through the Strait of Hormuz went to Asian markets in 2018. China, India, Japan, South Korea, and Singapore were the largest destinations for crude oil moving through the Strait of Hormuz to Asia, accounting for 65% of all Hormuz crude oil and condensate flows in 2018.

chart4-1.jpg

Source: U.S. Energy Information Administration, based on tanker tracking data published by ClipperData, Inc.

In 2018, the United States imported about 1.4 million b/d of crude oil and condensate from Persian Gulf countries through the Strait of Hormuz, accounting for about 18% of total U.S. crude oil and condensate imports and 7% of total U.S. petroleum liquids consumption.
Source: EIA

 

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Strait of Hormuz: imbalance of forces and guerilla warfare

 

 

The deployment of 1,000 more US troops to the Middle East highlights the imbalance of forces in the region between Washington and Tehran, which is experienced in maritime guerilla warfare and likely to avoid full-scale battles, experts say.

Washington has not specified when and where the new contingent will be deployed, but it comes less than three weeks after the US announced it was sending 1,500 soldiers, along with a squadron of fighter jets, to the region in response to alleged threats from the Islamic republic.

Any open confrontation between Washington and Tehran would therefore pit the US superpower — including its Bahrain-based Fifth Fleet and aircraft carriers — and its allies Saudi Arabia and Israel against an isolated Iran, whose economy has been crippled by years of sanctions and its military resources limited.

Saudi Arabia on Tuesday urged world powers to take “decisive action to ensure the safety of navigation in the waterways of the region”, after twin attacks on tankers in the Gulf of Oman last week escalated US-Iran tensions.

– ‘Guerrilla warfare’ –

“A US-Iran war wouldn’t be a naval war at all in the strict sense of the term,” wrote James Holmes, from the US Naval War College, in The National Interest.

“Guerrilla warfare, not the traditional sea fight, makes a better analogy for Iranian maritime strategy,” he added.

Jean-Sylvestre Mongrenier, researcher at the Franco-Belgian think-tank Institut Thomas More, said Iran is well aware it is no match for the aircraft carriers of the United States.

In waters they are familiar with, Iranians could pose problems for the US fleet, although they know they cannot compete head-on, analysts said.

Such actions could include placing mines in the Strait of Hormuz, harassing US navy craft with smaller warships and also using anti-ship missiles, Mongrenier said.

“The United States must also take into account the consequences of a possible direct confrontation with Iran on the overall balance of forces with China and Russia,” Mongrenier told AFP.

“Iran’s modes of action include the laying of mines in the Strait of Hormuz — Russian, Chinese and North Korean-made mines, but also Iranian-made mines — harassing US naval units by speedboats (armies of rocket launchers and short-range missiles) and the use of anti-ship missiles on land and sea,” said Mongrenier.

The narrow and shallow nature of the Strait of Hormuz is likely to play a major role.

– ‘Enemy’s passage’ –

In 1988, Operation Praying Mantis launched by the US Navy against Iranian oil platforms and facilities illustrated an imbalance of power.

In the midst of the 1980-88 Iran-Iraq war, Tehran had mined areas in the strategic navigation passage of the Strait of Hormuz, which the United States had vowed, as it has today, to keep open.

On April 14, 1988, the frigate USS Samuel B. Roberts hit a mine and almost sank, but there were no casualties.

In retaliation, the US military undertook a major offensive that included commando operations, launching missiles and aerial bombardments against two oil platforms Washington claimed were used as launching pads by Iranian speedboats and frigates.

In this naval battle, nearly 90 Iranian soldiers were killed and some 300 wounded, while two American pilots lost their lives when their helicopters crashed.

Any escalation between the United States and Iran would likely be played out at sea and have immediate global implications for energy markets if it affected shipping in the key transit point of the Strait of Hormuz.

Iranian forces “will concentrate asymmetric firepower and effort at the narrowest and most convoluted points in the strait, where an enemy’s whereabouts are known in advance, targeting is easy, and escape it heard,” said Holmes.

“So, don’t make the mistake of comparing force structures and concluding that the US Navy would steamroller the Iranian armed forces by dint of its total number of warships, aircraft, and armaments.”

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(edited)

This is genius.  Good luck world.  American oil all the way!  America First! 

Edited by BigJets
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(edited)

I think it’s very shortsighted to believe that the USA can walk away from the Persian Gulf as they no longer need the oil being produced in the region. KSA hold one quarter of the worlds “discovered” reserves. The USA has only just become a “net” producer and the USA does rely on imports from the region, plus many US IOCs have big interests in the Middle East.

IMO the USA still have to prove themselves as a proven sustainable net producer, let’s look at the situation in five years it may well be different!

Again I will quote that the USS Golan Heights, USS Dubai and USS Riyad are all major parts of the US war machine.

Iran and nuclear weapons is the same as Iraq and WMDs nothing has changed the US will not walk away from the Persian Gulf or the region just to let the Big Bear fill the vacuum.

https://www.brookings.edu/articles/the-persian-gulf-understanding-the-american-oil-strategy/

Edited by James Regan
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10 minutes ago, James Regan said:

I think it’s very shortsighted to believe that the USA can walk away from the Persian Gulf as they no longer need the oil being produced in the region. KSA hold one quarter of the worlds “discovered” reserves. The USA has only just become a “net” producer and the USA does rely on imports from the region, plus many US IOCs have big interests in the Middle East.

IMO the USA still have to prove themselves as a proven sustainable net producer, let’s look at the situation in five years it may well be different!

Again I will quote that the USS Golan Heights, USS Dubai and USS Riyad are all major parts of the US war machine.

Iran and nuclear weapons is the same as Iraq and WMDs nothing has changed the US will not walk away from the Persian Gulf or the region just to let the Big Bear fill the vacuum.

https://www.brookings.edu/articles/the-persian-gulf-understanding-the-american-oil-strategy/

I think the bigger message we are sending is no more relying on USA navy for transportation protection; and all the costs associated with it.  Disrupting global oil/energy trade by simply reducing our military presence will be a nice negotiating tactic.  China dies without their oil/energy suppliers.  USA is already moving on to new trading partners.  The whole world is reliant on USA for safe passage, we get nothing in return. 

On a serious note, what's to stop the USA from acquiring a full tanker coming out of the ME?  Nobody can touch our navy, our President knows this.  Now, he's swinging the big stick around.  We never have to invade again...just disrupt, disrupt, disrupt until our adversaries are ready to come to the table. 

"At current build out rates, the rest of the world's naval forces combined won't catch up with the USA until 2263."

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26 minutes ago, James Regan said:

I think it’s very shortsighted to believe that the USA can walk away from the Persian Gulf as they no longer need the oil being produced in the region. KSA hold one quarter of the worlds “discovered” reserves. The USA has only just become a “net” producer and the USA does rely on imports from the region, plus many US IOCs have big interests in the Middle East.

IMO the USA still have to prove themselves as a proven sustainable net producer, let’s look at the situation in five years it may well be different!

Again I will quote that the USS Golan Heights, USS Dubai and USS Riyad are all major parts of the US war machine.

Iran and nuclear weapons is the same as Iraq and WMDs nothing has changed the US will not walk away from the Persian Gulf or the region just to let the Big Bear fill the vacuum.

https://www.brookings.edu/articles/the-persian-gulf-understanding-the-american-oil-strategy/

No one says the US is "walking away" from the Mid-East. Other players need to step up and play their role, spend the $$$, put some serious skin in the game to make things safer and stable and provide for security and safety of the vessels in the region.

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(edited)

14 minutes ago, BigJets said:

 

 

Edited by BigJets

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The US is not yet a net oil exporter yet although it may happen as early as November according to reports. Middle East oil is not needed by the US because Canada already runs a couple of million barrels a day through he US above what the US needs for consumption.

Oil commenters need to read a few charts and quit giving out this false idea of US dependency   on Middle East oil. Or Russian oil or any other oil. 

Do US refiners need foreign oil to maximize capacity to resale on the world market? Sure. But that oil is not needed for US consumption. These are two different conversations the media and pro oil supporters like to mix to confuse consumers.

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(edited)

21 minutes ago, BigJets said:

"2263"

You are quoting P. Zeihan/G. Friedman and in regards to building a navy they are 100% wrong.  The number of hulls someone(China) can build is infinite as they have the iron foundries and workers whereas the USA cannot build hardly any as we have allowed IMPORTS to destroy our manufacturing base to protect the petro dollar. Irresponsible politicians, and irresponsible so called "central bankers"... AKA thieves looking at this short term picture.  It happened to the Brits.  It happened to the Spanish before them.  As for the ship hulls: The weapon systems on them is what is in question, not the number of hulls.  And no, you do not need nuclear power. 

Of course this is not truly where USA's power is.  It is in space, just as in WWII, USA's power was not in its army, but rather its airforce.  The Navy today is effectively what the Army was to the Airforce/naval air arm was in WWII.  A side show.  Technology changes.  Those guys are stuck in the past.  Take what they say with a VERY large grain of salt. Regards to geopolitics... fine.  Regards to tech/economics/religion and its effects?  RUN away from these guys. 

Personally?  Whole world has gotten clausterphobic like Europe due to changes in Technology.  I think it is a good time to be living in S. America going forward.  Just as TALL fences make good neighbors(Himalayas), being FAR away from your neighbors makes an even BETTER fence.  Doesn't mean there will not be fights, divorce etc in said house, but generally these affairs are small matters with lots of noise, but little substance. 

Edited by Wastral
grammer
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