Renewed Hostilities Halt Persian Gulf But Not Red Sea Shipping – What It Means for Shippers
Iran attacked three ships trying to cross the Hormuz Strait this week. The U.S. responded by striking approximately 170 Iranian military targets over a 48-hour period. Iran then tried to retaliate with attacks on U.S. bases in the Persian Gulf, but those were all but completely neutralized by regional air defenses.
This latest rise in hostilities means an official end to the ceasefire, a jeopardized Iran peace deal, another halt to shipping through the Persian Gulf, and an oil price spike.
Fortunately, the oil price rise appears to be a quick spike without sustained rising. In Tuesday’s blog post about surging freight rates looking like they’re about to drop, we talked briefly about eased pressure from oil costs. Per barrel prices were close to pre-war rates with Brent Crude reporting at $73.75 per barrel and West Texas Intermediate (WTI) trading at $70.13 per barrel. After the renewed hostilities and ceasefire officially announced as over, per-barrel-rates yesterday spiked to just short of $80 per barrel. Today, they came back down.
At the time of this writing, WTI crude oil is trading at $71.54 per barrel and Brent Crude at $75.85 per barrel.
The bigger issue is ship movement through the Persian Gulf. Tom Ozimek reported in the Epoch Times:
Vessel traffic through the Strait of Hormuz appears to have ground to a near-halt after the latest escalation of hostilities…
Iran’s three attacks against vessels in the Strait of Hormuz earlier this week led the U.S. Navy-led Joint Maritime Information Center (JMIC) to raise the threat level in the strait to “severe.”
Greg Knowler, in a Journal of Commerce (JOC) article, reported:
The latest ship attacks drew condemnation from International Maritime Organization (IMO) Secretary-General Arsenio Dominguez.
“As long as the safety and security of crews cannot be assured, I urge flag states, shipowners, operators and all relevant authorities to avoid exposing seafarers to unnecessary danger by transiting the strait,” Dominguez said in a statement.
However, Knowler’s article was at least half a good news one for international shipping.
Maersk Adds Second Service Through Red Sea
Confidence is growing in Red Sea and Suez Canal shipping.
Knowler reported in his JOC article:
Maersk is routing a second service through the Red Sea and Suez Canal following the incident-free transit of the Majestic Maersk through the region this week as part of Gemini Cooperation’s AE15 offering.
Carriers have been cautious in returning to Red Sea shipping since Iranian-backed Houthi rebels began attacking ships there at the beginning of 2023. As previously discussed in Universal Cargo’s blog, carriers have had little incentive to do so. Capacity implications of the situation have been a financial boon for them. Carriers were facing an overcapacity challenge when the Red Sea crisis struck. Diverting from the Red Sea down and around Africa required significantly more of carrier’s capacity, and freight rates, especially initially, soared.
Now, a return the Red Sea is an addition to the supply side of supply-demand equation of international shipping just as it looks like freight rates are about to start decreasing as capacity is already entering the market from other angles.
Renewed hostilities do affect confidence in shipping through the Red Sea and Gulf of Aden. Knowler wrote:
In announcing this week’s resumption of MECL voyages through the Red Sea, Maersk reiterated its position that the safety of crew, vessels and cargo “remains the highest priority.”
“Should the security situation change, which may necessitate reverting individual sailings or the wider structural change of the service back to the Cape of Good Hope route, we have contingency plans in place,” the carrier said.
It may be worth keeping those contingency plans close with the ceasefire between the US and Iran unraveling this week following attacks on three tankers transiting the Strait of Hormuz.
However, Maersk is getting a U.S. naval escort, so that should help with ship safety and confidence through the dangerous waters.
Outlook for Shippers
The real question is whether these latest geopolitical events will sustain the surged freight rates we’ve been seeing.
On Tuesday, we talked about industry analysts predicting freight rates had reached their peak and would soon start dropping. Some even thought the drop would start this week.
The major freight rate indexes, Drewry and the Shanghai Containerized Freight Index (SCFI), that released freight rate data today don’t show a decrease in freight rates. In fact, while the SCFI looked largely flat, there’s a 2% uptick from Drewry this week.
Oil’s short-lived spike may be foreshadowing for freight rates’ reaction to this week’s hostilities. There shouldn’t be a long-lasting impact. Maybe there’ll be a slight freight rate surge from it. Carriers will definitely try to use it to maintain their current higher freight rates. However, there’s virtually no impact on capacity, especially if the slow return to the Red Sea doesn’t pause.
More capacity is still on the way to international shipping waters, so freight rates are really going to depend on demand. If demand remains strong or even manages to grow during the upcoming traditionally strong weeks of peak season, high freight rates will hold or even see some increase. If frontloading ends and dampens peak season demand, freight rates should sink.
Of course, if the latter happens, expect carriers to implement blank (cancelled) sailings to try to keep capacity from well-outpacing demand.
