In early February, the oil market found temporary relief in the prospect of a ceasefire in the Israel-Hamas conflict, but a recent series of Houthi assaults has revived concerns about the crisis in the Red Sea, causing tanker rates to rise.
The Houthis, aligned with Iran, claimed responsibility for the attack on the oil tanker M/T Pollux bound for India last Friday. Fortunately, there were no reported injuries.
Following this attack and others that occurred after a brief lull in early February, major maritime insurer Steamship Mutual has issued an exclusion for all war risk claims in the Indian Ocean, Gulf of Aden, and Southern Red Sea.
According to S&P Global Commodity Insights, any new insurance policies issued for Red Sea routes could potentially increase oil prices by $1 or more per barrel. The alternative of rerouting around Africa’s Cape of Good Hope may lead to higher operational costs and increased vessel utilization.
Despite the significant rate increases for very large crude carriers (VLCCs), some vessels continue to brave the Red Sea route. Data from Clarksons indicates that Red Sea arrivals of crude tankers are currently at 50% to 60% of levels seen in the first half of December.
Clarksons also reported that the average rate for VLCCs traveling from the Middle East to China has reached three-month highs at $66,600 per day. This marks a notable increase compared to previous quarters, where rates were significantly lower.
Although VLCC rates have experienced extreme fluctuations in the past, Bank of America’s analysis suggests that rates are expected to remain between $40,000 and $50,000 per day in March, before declining to $35,000 to $40,000 over the second quarter.
Despite the uncertainty surrounding tanker rates, rising oil demand could help sustain current highs in the market. However, geopolitical risks in the Red Sea have yet to significantly impact oil prices, which have been influenced more by concerns over weak fundamentals and the possibility of a recession.
Analysts suggest that January’s global oil surplus, which typically affects prices, is less severe compared to previous years. As a result, there’s anticipation for a considerable deficit in February that could shift market dynamics in a more bullish direction.
The future balance of oil supply remains uncertain, with factors such as U.S. crude oil exports increasing and Saudi Arabia scaling back production capacity plans. Additionally, the U.S. imposition of sanctions on entities violating price caps on Russian crude could further influence demand in the legal tanker market.
While current growth in tanker rates is seen as temporary, there’s a possibility that these gains could persist in the long term.