The current state of affairs between the UK and Iran has sparked tales of the Suez Crisis and the Gulf War, so why has there been minimal impact on freight rates and crude prices?
First, there hasn’t been any major disruption to flows through the Middle East Gulf, thus far, Gibson Shipbrokers said in an analysis of the situation.
The reported inspection of the 2,000 dwt tanker ‘Riah’ would barely have been newsworthy had it not been for the current media hysteria, but the recent seizure of the ‘Stena Impero’ has made owners nervous.
Furthermore, those looking to operate in the region that are not British linked may feel the current tit for tat measures between Iran and the UK, pose a lower risk. If removing all British flagged product and crude carriers out of the total trading tanker pool, this represents a drop of only 2% in the global fleet.
However, the British-managed VLCC ‘Mesdar’ did spook the markets when it seemed to change course abruptly to Iran before heading back into the Gulf. Although there were attacks on five non-British operated vessels around the Gulf, Iran has denied any involvement.
Second, global demand growth has slowed. The IEA reported that 1Q19 global oil demand growth had slumped to 310,000 barrels per day, the lowest figure recorded since the end of 2011.
Although factors, such as limited output from Iran and Venezuela and OPEC+ led production cuts should suggest a bullish tone, slower global economic growth and trade wars between major economies present a downside demand risk.
However, the IEA has estimated a stronger second half of this year, due to economic activity output improving and new plants ramp up, which could support prices later in the year.
Finally, the world remains oversupplied, hence the recently agreed extended cut in OPEC+ production.
In June, world oil supply topped the 100 mill barrels per day mark for the first time since January, according to the IEA. There have been calls for OPEC+ to cut crude production to 28 mill barrels per day - the lowest since 2003 - down from current levels of around 30 mill in an attempt to rebalance the markets.
Global inventories and stocks are still deemed too high. The benchmark Brent crude price briefly reached a yearly peak of $74 per barrel in April, but recent events in the MEG have affected crude price volatility by only 4%, with prices barely moving from the mid-$60 per barrel levels throughout.
In comparison, when OPEC announced its first round of production cuts back in December, Brent moved 8% overnight.
Production cuts have also had a knock on effect for tanker rates. For example, the benchmark VLCC rate -TD3 - has fallen WS6 points to WS42 ($1.21per tonne) since the start of July, despite MEG tensions.
At the moment, owners have adopted a ‘sit and wait’ policy whilst acting with caution throughout the region. The global knock on effect for the tanker market at the moment seems to be fairly muted and its business as usual, Gibson said.