Poten & Partners: Global tension has limited impact on tanker market (so far)

Geopolitical tension and the tanker market are linked, because there is typically a close relationship between geopolitical events and oil prices. Historically, many of the world’s leading oil producing countries are politically unstable and some are at odds with the U.S. and subject to sanctions. Going back to the 1960s, geopolitical events have been the catalyst for many of the biggest moves in tanker rates and prices. The closing of the Suez Canal on 5 June 1967, at the beginning of the Six Day War is probably the best known and certainly one of most impactful examples. The closure of the Suez Canal was sudden and unforeseen and created an unexpected shock to global trade flows. The closure, which lasted eight years, fast-tracked the growth of the VLCC and ULCC fleet, to take advantage of their superior economies of scale. Freight rates initially skyrocketed, but in later years dropped due to the significant overbuilding of tanker capacity. When the Suez Canal reopened in 1975, it was deemed a non-event for the tanker market, which was already depressed. Another geopolitical event that had a big impact on the oil and tanker markets was the Iranian revolution of 1979, followed in 1980 by Iran-Iraq War which lasted until 1988. The common denominator for geopolitical events that have a significant impact on the tanker market is that it is a surprise event in a relatively balanced market. If we look at the current geopolitical landscape around the world, where is it most likely that we could experience a surprise?

Iran is the first place that comes to mind. Iran is facing severe pressure from the United States after President Trump pulled out of the Iran Nuclear Deal in 2018. Between mid-May and mid-June, six tankers were attacked just outside the Arabian Gulf. The U.S. blames Iran, but Tehran denies the allegations. On4 July, authorities in Gibraltar, assisted by the British navy, seized the Iranian VLCC Grace 1, claiming the vessel was taking Iranian oil to Syria, in breach of EU sanctions. Again, this was denied by the Iranians. In an apparent retaliation, Iranian vessels attempted to stop the BP operated tanker British Heritage from passing through the Strait of Hormuz. According to a U.K. government statement, the British navy intervened, although Iran denied the incident. It is clear that the tension in the region is rising and a sudden escalation of the conflict, leading to the (temporary) closure of the Strait of Hormuz, is possible. Because a significant portion of the world’s oil exports are transported through this chokepoint, there will be an immediate and significant impact on the oil and tanker markets.