Rising Tensions: How an Intensified Israel-Iran Conflict May Drive Up Maritime Risk Costs

Tensions in the Middle East, particularly between Israel and Iran, could lead to an increase in maritime war risk premiums, as highlighted by a recent publication from S&P Global. The current additional premium sits at approximately 0.05% to 0.07% of a vessel’s hull and machinery value for a week spent in the Persian Gulf—a figure that has remained stable for the past year and a half.

Charterers are feeling the pinch; naphtha importers in North Asia are shelling out around $50,000 per trip from this high-risk area due to its classification by maritime insurers over the last six years. This designation followed several incidents involving oil tankers, including the infamous attack on the LR2 tanker Front Altair back in June 2019.

Interestingly, insurers do offer some relief for fleet owners—those with larger operations can benefit from discounts that allow longer crossings or combine transit times across multiple vessels to help cut costs. However, according to a VLCC broker, irrespective of these discounts, overall shipping expenses are expected to rise and will ultimately be passed down to charterers. Any retaliatory actions from Iran could further inflate cargo prices and insurance fees.

This escalation comes at a time when shipowners were being encouraged to ramp up cargo shipments through the Suez Canal as signs of easing tensions emerged. As a notable example, many distillate shipments originating from Sikka on India’s west coast have been utilizing this route despite higher delivery costs.

Some Mediterranean owners—particularly those with Persian or Greek ties—are opting for routes through the Red Sea instead; they enjoy important freight premiums while charterers absorb additional war risk premiums (AWRP). Should hostilities intensify further, it may disrupt efforts aimed at stabilizing conditions in this crucial waterway.

While voyages transporting refined products from the Persian Gulf via Red sea can save up to two weeks compared with routes around Africa’s Cape of Good Hope,freight rates remain comparable because many shipowners shy away from navigating through possibly risky waters like those of the Red Sea. Until recently, AWRP there was about 0.4% to 0.5% based on H&M values for seven-day transits.

Charterers also face fixed charges amounting to $150,000 when moving cargoes using LR Tankers along routes between Persia Gulf and Africa; these fees cover security measures such as armed guards onboard vessels.

Currently observed trends show that naphtha deliveries along trade routes between Red Sea-North Asia have seen thier premiums drop substantially—from w120 earlier this year down to w20 now—while gasoline trades on MR tankers have similarly decreased their premium rates sence late last year.

Moreover, what was once an exorbitant $600K premium for crossing into Persian Gulf waters has flipped into an equivalent discount when compared against routes leading into Europe via Red Sea—a notable shift indeed! A tanker broker monitoring these transactions suggests that if freight rates continue rising for both regions involved (Persian Gulf and Red Sea), we might see changes again soon enough!

References: S&P Global; India Ship News