The recent escalation of attacks by the Iran-aligned Houthi rebel group in Yemen has reignited concerns about the stability of the Red Sea region, impacting global oil markets and tanker rates. Despite hopes for a ceasefire in the Israel-Hamas conflict earlier in February, the resumption of Houthi attacks has prompted major maritime insurer Steamship Mutual to issue an exclusion for all war risk claims in the Indian Ocean, Gulf of Aden, and Southern Red Sea. This move has significant implications for oil prices, with potential impacts of $1 or more per barrel due to increased insurance costs for vessels navigating these risky waters.
As a result of the heightened risk in the Red Sea, some tanker operators have opted to reroute their vessels around Africa’s Cape of Good Hope to avoid the dangerous region. However, this alternative route comes with its own set of challenges, including higher operational costs and increased vessel utilization. Despite these challenges, some tankers continue to brave the Red Sea route, albeit at reduced levels compared to previous months.
The impact of these developments on tanker rates has been substantial, with average rates for very large crude carriers (VLCCs) experiencing significant growth. According to data from Clarksons, VLCC rates from the Middle East to China have surged to three-month highs, reaching $66,600 per day. This represents a stark contrast to previous quarters, where rates averaged below $21,000 per day.
While VLCC rates are expected to remain elevated in the near term, analysts anticipate a moderation in rates over the second quarter of the year. Bank of America forecasts VLCC rates to range between $40,000 and $50,000 per day in March, before dropping to $35,000 to $40,000 over the subsequent months.
Despite the potential for a slowdown in tanker rate growth, rising oil demand could provide support for rates at current levels. However, geopolitical tensions and concerns about global economic fundamentals continue to weigh on oil prices. While recent attacks in the Red Sea have yet to significantly impact oil prices, analysts suggest that a shift in market sentiment could occur as supply-demand dynamics evolve.
Looking ahead, the outlook for oil markets remains uncertain, with various factors such as U.S. crude oil exports, Saudi Arabia’s production decisions, and ongoing geopolitical tensions likely to influence market dynamics. While the current surge in tanker rates may be transitory, it could signal longer-term changes in the market landscape, particularly as efforts to mitigate risks in the Red Sea region continue.
Inspired by: https://www.freightwaves.com/news/war-risk-exclusions-by-insurers-heighten-stakes-in-red-sea-attacks