Tanker cycle timing: from ‘scramble mode’ to demand destruction
STOCK prices are up and oil futures are down on expectations that US President Donald Trump will retreat from the war with Iran. But a US withdrawal leaving the Strait of Hormuz under Iranian control implies a longer duration for shipping disruptions.
Tanker markets are expected to follow a two-phase pattern if freedom of navigation is not restored.
The first, already in full swing, is “scramble mode”, where buyers book whatever supplies they can. The second is the demand-destruction phase, as diesel, jet fuel and gasoline prices climb too high for too long.
Crude export alternatives to the strait — Yanbu in Saudi Arabia and Fujairah in the UAE — have ramped up quickly. These pipeline-fed replacement sources, together with stronger flows out of the Atlantic basin, have offset a surprising amount of lost Hormuz volumes.
These replacement sources could eventually be supplemented by a modest recovery of Hormuz transits, assuming Iran lets more “friendly” tankers through under its toll system.
Overall, the loss of global oil supply amid the Middle East war appears to be less than initially feared — keeping tankers very busy. The timing question is: when do market dynamics flip from a desperation-induced tailwind for rates to an economics-induced headwind?
There’s no sign of this yet. The Baltic Exchange’s US Gulf-China index for very large crude carriers jumped to $167,120 per day on Wednesday, up 24% versus Tuesday and up 59% from March 17.
‘We’re still in that scramble mode’
“Every geopolitical event is different, and with this one, we’re still in that scramble mode. It is: just get me some oil and get it here fast,” said Jeff Pribor, chief financial officer of International Seaways, at a New York Maritime (NYMAR) forum on Tuesday hosted by Norton Rose Fulbright.
“This period has lasted longer than I might have guessed. We’re still in a very elevated rate environment,” Pribor said.
Tanker demand is benefitting from highly unusual routings as buyers take whatever cargoes they can get.
According to Erik Broekhuizen, head of marine research and consulting at Poten & Partners, “Asia is obviously much more dependent on the Middle East, so you could foresee that Asia would run out of crude earlier and would be more desperate to get additional barrels.
“There is significant demand for barrels out of the US Gulf, and we’ve seen suezmaxes and aframaxes fixed to the Far East.
“Usually you wouldn’t do that, because VLCCs would be the way to go. But when you run out of VLCCs, you grab whatever is available. They also wanted to get it quick, so there was a premium for ships that could go through the Panama Canal rather than go the long way,” said Broekhuizen.
The same dynamic applies to products tankers, with rates surging as well. Medium-range product tankers “are making close to $100,000 per day — that’s part of the scramble mode we’re in”, said Pribor.
Crude exports partially rebound
David Wech, chief economist of Vortexa, highlighted the importance of Hormuz replacement flows during a Vortexa presentation on Tuesday.
“We have four weeks of war in the Middle East behind us, and we have focused so far on the massive amount of supply we are losing, but last week was very interesting. When we look at it from a global scale, last week was very well-supplied in comparison to previous weeks.”
Vortexa analysed global seaborne crude and condensate exports, excluding Iran and countries with high re-exports. In the week ending March 29, this adjusted export measure surged by 5.1m barrels per day or 15% versus the prior week.
That said, last week’s average was still down 5.9m bpd or 13% year on year, and down 5.4m bpd or 12% versus the 2016-2025 average.
“The message is definitely not that the supply problem is over. It is that, at this point in time, the supply problem looks to be significantly smaller than was the case before,” said Wech.
Middle East loadings in Yanbu and Fujairah totalled 6.2m bpd in the week ending March 29 (4.4m bpd at Yanbu, 1.8m bpd at Fujairah), with Yanbu at more than quadruple pre-war levels.
“That, roughly speaking, is cutting the Middle East supply loss in half,” said Wech.
Rebounding Middle East flows are coinciding with gains in the Atlantic basin, including “very strong liftings in Brazil”.
“The question is: how sustainable are these changes?” said Wech. Volumes from Yanbu “are likely to be sustained unless there is a further escalation in the region and the Bab el Mandeb strait is blocked. In the Atlantic Basin, I would argue that it’s more questionable that this will be sustainable.”
The rebound in crude exports was mirrored by strong performance for clean products and dirty products (fuel oil).
“Over the last four weeks, total clean products, including LPG [liquefied petroleum gas], are slightly above the seasonal average for the last 10 years. There is still a significant shortfall compared to where we were last year and the year before, of around 2m bpd. That is significant but not as big of a crisis.
“With dirty products, the last three weeks have been reasonably strong and, on average, actually above year-ago levels.
“What we see across the board is that players are reacting to very strong price signals and sending out more barrels. There has been a reaction.
“The crucial question for the next couple of weeks is: will this recovery in supply continue or is it more of a temporary thing?”
Strait closure and demand destruction
On one hand, a US decision to not escalate the war is positive for tanker demand. Escalation could lead to destruction of more energy infrastructure in the region, which could remove more cargo supply for a much longer period. Escalation could also prompt the closure of the Red Sea route.
On the other hand, a US strategy that leaves the Strait of Hormuz under Iranian control would keep too much supply offline, even with the alternatives in Yanbu, Fujairah and the Atlantic basin. That implies rising demand destruction.
The consensus at the NYMAR event was that the scramble mode is unlikely to persist if the Strait of Hormuz remains effectively shuttered.
“If this doesn’t end and goes on for another month, you could see a drop in rates after that scramble period is over and there’s not enough oil to move,” said Pribor.
Broekhuizen said, “If this situation goes on for a little bit longer, then the only way to reduce oil demand is demand destruction and you need much higher oil prices to make that happen.”
Pribor said, “I don’t think we’ve really felt the effects of demand destruction yet. But I don’t think we’re far away from that.”
Deutsche Bank energy analyst Michael Hsueh wrote in a report on Tuesday: “President Trump’s indications that the US would be willing to end the Iran war without a reopening of the strait shocks the established calculus. While implicitly ending the cycle of escalation, it could leave a longer, if less intense open-ended tail to the conflict.”
Hsueh assumes Hormuz traffic would need to return to 70% of pre-war levels to normalise oil supply. He projected that if this does not occur until June, Brent would be in the range of $130-$150 per barrel.
If the strait does not reopen until November, Hsueh estimated that Brent would be in the range of $170-$190 per barrel.
“There is likely to be meaningful demand destruction,” he warned.
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