War risk premiums for tankers surge midst Middle East tensions

Although the United States and Iran have apparently both backed away from a military face-off, oil and gas shipowners are bracing themselves against a war of words which could see lead to asymmetric warfare in the Middle East, which in turn could raise insurance premiums.

War risk premiums for tankers shuttling through the Strait of Hormuz have risen significantly, adding hundreds of thousands of dollars to shipping costs which in turn will be passed on buyers located mostly in Asia, said industry sources.

Around 20% of the world’s crude oil supply and a quarter of the globe’s liquefied natural gas (LNG) supply are transported on tankers through the Strait of Hormuz.

They key players here are Saudi Arabia, the world’s biggest crude oil exporter, and Qatar, the world’s top LNG exporter.

“We are obviously concerned with regard to the tension around the wider (Gulf) area,” said Svein A Ringbakken, managing director of Norwegian ship insurer Den Norske Krigsforsikring. “Ships’ transits in these areas have already for some time been subject to additional war risks insurance premiums which may increase in light of the recent developments.”

Owners of tankers pay an annual war-risk insurance premium as well as an additional ‘breach’ premium when entering high-risk waters. These premiums are calculated according to the value of the ship, for a seven-day period.

According to ship insurers, the breach rate for 7 day period is at around 0.35% of insurance costs, up from around 0.15% in December.

“Depending on the type of ship, this adds about $150,000 to $200,000 (to overall costs) per trip,” said a Singapore-based LNG shipbroker.

However, others from the shipping industry are less concerned about these extra financial burdens saying, the current pricing of Gulf risks have already factored in the potential for another attack on merchant shipping and thus may not change – unless the situation worsens.

“For LNG markets, the escalating tensions in the Middle East mean all eyes will be on any risk to passage through the Strait of Hormuz,” said Saul Kavonic, an analyst with Credit Suisse.

He went on to add, “A prolonged closure of the Strait of Hormuz could see LNG spot prices skyrocket, and see a demand destruction scenario emerge turning the current soft LNG market on its head”.

Spot Asian LNG prices are currently languishing at their bottom most level for this time of the year.

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