With U.S.-provided air cover helping tankers traverse the Strait of Hormuz, Persian Gulf oil transportation has shown resilience beyond expectations.
According to ship-tracking agency Kpler, in the week ending October 18, the daily flow of Middle East oil exceeded 24 million barrels, higher than the pre-war level of 23.3 million barrels.
Even as Iran recently launched its most intense wave of attacks since the war began, crude oil continued to be shipped out, though high freight rates, war-risk insurance, and crew bonuses are driving up transportation costs and could eventually feed through to the global energy market.
In the week ending October 18, the daily flow of Middle East oil, including oil transported through the Strait of Hormuz and oil shipped via alternative routes in the region, surpassed pre-war levels.
However, preliminary data show that the daily oil flow through the Strait of Hormuz itself was about 14 million barrels, equivalent to 82% of the pre-war level, including ship-to-ship transfers in the Gulf of Oman.
On Tuesday, international benchmark Brent crude rose to about $108 per barrel. Traders worry that the current transportation system may be difficult to sustain over the long term, especially if the conflict escalates again.
Global oil inventories continue to shrink, leaving the market with little buffer to handle new supply disruptions. The recovery in shipping flows is changing the contest over the world's most important energy chokepoint.
Iran still has the ability to make passage through the strait dangerous and expensive, but its deterrence against stopping ships is weakening, and Tehran is therefore losing some of its bargaining leverage with the United States.
Hamad Hussain, senior commodities economist at Capital Economics, said: "Overall, a system for transporting oil through the dangerous Strait of Hormuz has matured, and the parties involved in oil exports have become more willing to take risks."
Alternative pipelines and ship-to-ship transfers support exports, Iran's blockade effect weakens
Saudi Arabia and the United Arab Emirates are using pipelines to send crude to export routes outside the Strait of Hormuz. Kpler estimates that in September, about 40% of non-Iranian crude exported from the Persian Gulf bypassed the Strait of Hormuz, compared with only 17% before the war. This means Gulf oil producers are reducing their dependence on the strait through pipelines and ship-to-ship transfers.
Although Iran can still attack tankers and increase navigation risks, its ability to stop neighboring countries from exporting oil has been weakened. This situation stands in sharp contrast to the export blockade Iran itself faces. The U.S. maritime blockade has obstructed Iran's oil exports, while other Persian Gulf producers are still finding ways to ship crude to international markets.
As the U.S. midterm elections on November 3 approach, Iran may try to reassert influence through more intense attacks, and may even seek to drag the United States into a new round of confrontation. Based on information from the UK Maritime Trade Operations center and several maritime security companies, about 30 ship attack incidents have been reported this month. Michelle Wiese Bockmann, senior analyst at maritime intelligence firm Windward, said attacks in October accounted for 20% of all ships attacked during the entire war.
Christopher Long, a former British Navy officer now at Neptune P2P Group, said: "Iran is trying to re-establish its blockade of the strait." But for many oil traders and shipowners, transportation profits are still enough to offset some of the risk. Homayoun Falakshahi, head of crude oil analysis at Kpler, estimates that compared with before the war, traders can earn an extra $20 per barrel when reselling Iraqi crude. A single very large crude carrier's cargo could therefore generate about $40 million in additional profit. By that estimate, after completing just three such voyages, a shipowner could potentially recover the purchase cost of a $100 million second-hand VLCC.
Rising profits are also attracting more ships into the Persian Gulf. Shipbrokers say that because local tanker freight rates have risen to unprecedented highs, some older vessels previously used to transport Venezuelan and Russian oil are being redirected to the Persian Gulf. Shipping companies are also attracting seafarers to take on risk by increasing crew pay. According to The Wall Street Journal, some ship operators are offering crew members willing to sail into the Persian Gulf bonuses equal to two to three times their usual monthly salary. A crew recruitment company headquartered in Asia has even offered up to $25,000 for a single round trip, which usually takes one to two weeks.
Falakshahi said: "Despite increasing attacks, transportation volumes remain high because profits are enough to make people willing to take the risk."
U.S. air cover and ship-to-ship transfers keep transportation going, but tankers still face attacks
The current transportation system relies on a combination of arrangements. Many tankers conduct short-haul shuttle runs within the danger zone, while U.S.-provided air cover offers some protection for a shipping corridor along the coast of Oman. Tankers usually first load crude inside the Persian Gulf, then sail out through the Strait of Hormuz, often turning off ship-tracking signals along the way. They then stop near Oman, transfer crude to other vessels heading to distant markets, and return to the Persian Gulf to load the next cargo.
The return voyage to the Persian Gulf is precisely the phase in which these tankers face the highest risk of attack. Iran's Islamic Revolutionary Guard Corps is using drones and missiles to try to stop ships from completing such voyages. Iran has also begun adopting guerrilla tactics long used by Yemen's Houthi armed group to attack shipping activity near the entrance to the Red Sea, including arranging personnel on small fishing boats to monitor vessels and sending armed personnel to sea.
A Tanzania-flagged VLCC named "Loyalty" illustrates the profits and risks of this transportation system. The vessel had spent years shipping Venezuelan crude to China, but since September it has entered the Persian Gulf twice to load crude from Iraq. One crew member said that before each voyage, the ship notifies the U.S. Navy, and security personnel are also stationed on board. According to Kpler data and the crew member's account, in early October, "Loyalty" transferred 2 million barrels of Iraqi crude to an unidentified tanker in the Gulf of Oman, then sailed back into the Persian Gulf to load a new cargo. Before the second voyage, the ship management company also sent body armor and helmets to the crew.
But the extra protection did not eliminate the risk. Maritime security company Vanguard said that on October 16, "Loyalty" was hit by a rocket-propelled grenade fired from a small boat, and the projectile punched a hole in one of the ship's freshwater tanks. The crew member said that at the time of the attack, the ship was carrying 2 million barrels of Iraqi crude.
Freight rates and insurance premiums soar, and transportation costs are eating into the gains from restored supply
Continued attacks are significantly raising the cost of moving Persian Gulf oil to market. Kpler said that this week, the freight rate for a VLCC carrying Persian Gulf crude to Asia approached a record level, reaching $37.37 per barrel. War-risk insurance premiums have also climbed sharply. Windward's Wiese Bockmann said related insurance costs can now reach as much as 10% of a vessel's value, compared with less than 3% before the war.
Natasha Kaneva, head of the global commodities strategy team at JPMorgan, said: "In April, the problem was a lack of crude; by October, the problem became the cost of transporting crude." High freight rates and insurance premiums mean that even if crude can continue to leave the Persian Gulf, the cost of getting it to buyers is still rising. These costs may ultimately be passed on to consumers through fuel and petroleum product prices.
At present, Middle East oil flows have already exceeded pre-war levels, but transportation volumes through the Strait of Hormuz have still not recovered to the pre-war scale, with alternative routes, ship-to-ship transfers, and U.S.-provided protection playing an increasingly important role. At the same time, Iran continues to attack tankers, and global oil inventories are declining, exposing the transportation system to new uncertainty.
Capital Economics' Hussain said: "If Iran wants to regain the previous degree of control over oil flows in the region, it will have to take more aggressive action." Although Iran has threatened that if it cannot export oil, it will not allow neighboring countries to export oil, Persian Gulf crude is still being shipped out. The current contest is no longer just about whether tankers can pass through the strait, but also about who can bear higher transportation costs and how long this high-risk transportation system can last.
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