The dangerous geopolitical chess game in the Persian Gulf just got even more complicated. For the first time, the U.S. has imposed sanctions on a Chinese company for purchasing Iranian crude oil.
The U.S. reimposed sanctions targeting Iranian petroleum exports effective November 2018. Waivers were granted to eight countries, including China. Those waivers expired in May 2019, but China has reportedly continued to import Iranian oil.
On July 22, the U.S. Office of Foreign Assets Control (OFAC) confirmed that it had placed Beijing-based Zhuhai Zhenrong Company on its specially designated nationals list (SDN). Entities on the SDN cannot transact business in U.S. dollars and cannot do business with U.S. citizens or companies.
For cargo shippers and transportation companies, the OFAC decision is potentially important because it coincides with renewed trade talks between the U.S. and China.
U.S. penalties on Chinese purchases of Iranian oil have the potential to complicate negotiations and therefore affect future trade flows of everything from containerized goods to soybeans to oil and liquefied natural gas.
Changing tanker routes in Persian Gulf
Meanwhile, rising risks to shipping assets and seafarers in the Strait of Hormuz remain on center stage following Iran’s seizure of the U.K.-flagged tanker Stena Impero on July 19.
Routing patterns had already shifted following attacks on tankers in May and June, and the Stena Impero incident could lead to further changes in how tankers operate in this area.
In a statement sent to FreightWaves, Tel Aviv-based maritime risk analytics company Windward confirmed that “recent developments are prompting a shift in operational patterns for tankers crossing the Strait of Hormuz.”
According to Windward, “There are now 22 percent fewer of them [tankers] sailing through Iranian waters compared with four weeks ago. While this may mitigate security risks, there is a question as to whether this is happening at the cost of safety, as vessels avoid established shipping lanes.”
Windward used vessel tracking data to show how tankers have been taking a longer detour to avert potential trouble.
After tankers load cargoes in Saudi Arabia, Kuwait or Iraq, and head east toward the Strait of Hormuz across the Persian Gulf, more are taking a southerly route, skirting much closer to the coast of the United Arab Emirates – away from the shipping channels of the region’s traffic separation scheme (TSS). The detouring ships are then re-entering the TSS close to the narrowest part of the Strait of Hormuz.
Escorted voyages to come?
In general, the regional tensions are causing the shipping network to be less efficient. By not taking the most direct route, voyages take longer and cost more.
Another network inefficiency that could soon be introduced is the use of naval escorts. The U.S. has proposed that its navy help coordinate such an effort and for other countries’ navies to serve as escorts for tankers flagged to those respective countries.
On July 22, when U.K. foreign secretary Jeremy Hunt addressed Parliament, he called the Iranian seizure of the Stena Impero “an act of piracy” and proposed “a European-led maritime protection mission to support safe passage of both crew and cargo” through the Strait of Hormuz.
When commercial ships have required naval escorts in the past – as when transiting the Gulf of Aden at the height of Somali piracy attacks in the 2000s – transport delays ensued.
After last month’s attack on the tanker Front Altair, owned by Frontline (NYSE: FRO), and the chemical tanker Kokuka Courageous, operated by Bernhard Schulte, Stifel analyst Ben Nolan said in a client note that there could be a “need for increased international protection for ships transiting the region, with some possibility of escorted convoys.”
Nolan’s note continued, “This could slow the tanker logistics for loading and unloading.” He estimated that it could add an additional one to two days of transit time and increase transit time overall by 2 to 3 percent, which could reduce overall capacity in the very large crude carrier (VLCC) fleet by 1 percent. VLCCs are tankers designed to carry two million barrels of crude oil each and are the primary vessels used to transport crude from the Persian Gulf.
IEA seeks to calm oil supply fears
The broader fear is that tensions escalate, a military conflict ensues and shipping is temporarily blocked from using the Strait of Hormuz. If this were to occur, the cost of all types of fuel around the world would spike, with major cost implications for all transport modes, from ocean shipping and air to rail and trucking.
Following the seizure of the Stena Impero, Brent crude futures rose 2.26 percent on July 22.
Oil supply fears elicited a special announcement on July 22 by the Paris-based International Energy Agency (IEA), which was founded in 1974 to help its members coordinate a collective response to major supply disruptions.
The IEA said that it believes “the right of free energy transit is critical to the global economy and must be maintained” and that it is “closely monitoring developments” and “stands ready to act.”
If there is any good news, it is that geopolitical tensions are escalating at a time when oil is abundant. According to the IEA, “Consumers can be reassured that the oil market is currently well-supplied, with oil production exceeding demand in the first half of 2019, pushing up global stocks by 900,000 barrels per day. OECD stocks now total more than 2.9 billion barrels, which is higher than the five-year average.”
The IEA disclosed that its member countries have 1.55 billion barrels of “public emergency oil stocks” in hand, with a further 650 million barrels “held by industry under government obligations” that “can be released as needed.” The agency insisted that “these emergency stocks are large enough to cover any disruptions in oil supply from the Strait of Hormuz for an extended period.”