Hormuz transits so far within normal range

We have closely tracked transit levels through the Strait of Hormuz since June 13, which remain within normal ranges. Transits for the week ending June 22 were robust, 4% above the 2024 average and slightly higher than the weekly average for the month leading up to the attack. This strength in overall transits in the third week of June is worth highlighting, especially because crude/condensate exports from within the Middle East Gulf were very strong in H1 June, as term contracts and front-loading saw exports up almost 20% m-o-m (June 1-15). The dip we have observed in crude tanker transits specifically is a function of reduced export momentum in H2 of the month, which is a common occurrence in MEG loadings.

On an average transits-per-day basis, June figures (days 1-22) are still at a seasonal high. Although there has been volatility day-to-day in terms of transit numbers since the attack, fluctuation in daily transit figures even in normal times is common, and we would caution against drawing conclusions from daily transit changes over a short period of time. This is why we have looked at these transit patterns from a weekly perspective.

Our data shows that operators are not avoiding transiting the Strait of Hormuz, but we have observed instances of vessels waiting outside the strait and appearing to only transit when necessary to make a laycan window.

Risk drives up market sentiment, leading to substantial gains in spot freight rates

Despite the low likelihood of a Hormuz closure, even after Iran’s statements this weekend post-US strikes, the tanker market must still account for the inherent risk in voyages in and out of the Middle East Gulf via Hormuz. Consequently, spot freight rates since June 13 have shot up, with VLCC rates out of the Middle East swinging from around ytd lows on June 12 to 16-month highs as of June 23, a rise of more than 100%. This has lifted VLCC rates globally, with US Gulf-origin VLCC rates seeing a 40% rise over the same period.

Increases in War Risk Premiums, which had not risen last week despite rising freight rates, were reported on Monday (Tradewinds) to have increased post-US strikes, another sign that freight costs for charterers will continue to rise as tensions endure.

Although the chance of a strait closure is vanishingly small, the market would be able to endure a loss of crude requiring a Hormuz transit for around 13 months, due to a long supply chain. This goes towards explaining the relatively muted crude price reaction so far (read more here). However, with rising freight costs out of the Middle East, Asia may begin to make alternative purchases from the Atlantic Basin, which will inject tonne-mile demand into the equation, and put more upward pressure on VLCC rates as demand increases at the same time as possible tightened fleet availability due to risk concerns.

The other key asset class operating out of the Middle East Gulf is LRs, either taking naphtha East or middle distillates to Europe. Like VLCCs, LR rates have risen rapidly from the sluggish levels observed in the weeks leading up to the conflict. LR1 eastbound rates have increased 66% since the conflict began, LR2 eastbound have increased 85%, and LR2 westbound have increased 65%. We have already observed an uptick in transatlantic diesel exports from the US Gulf to Europe, and an increase in MR rates on the route, which is likely driven by supply fears in Northwest Europe and concerns about the unworkability of E-W middle distillate flows. Alternately, India West Coast volumes and Saudi Arabia’s exports via the Red Sea ports of Yanbu and Jizan could take on outsized importance as a source of Wider Arabian Sea middle distillates for Europe. Naphtha exports from the MEG to Asia would be more difficult to replace, but LR voyages from the Med and Russia Baltics going East would likely increase.

Will freight rate rises continue?

We are hearing of a clause vessel operators are considering, which would enable them to withdraw from voyages at any time due to safety concerns, without being subject to arbitration. This enables vessel operators to continue to command high rates due to the heightened level of risk while also reducing exposure in the event of real danger.

President Trump’s announcement last night of a ceasefire, which was reportedly agreed upon by Israel and Iran, could halt the rise of freight rates and ease concerns about the risk of Hormuz closure. At the time of writing, oil traders appear to be anticipating an end to the conflict, as crude prices are now falling towards pre-conflict levels. However, until there is actual evidence the ceasefire has been agreed upon by Israel and Iran and attacks actually cease (not happening at the time of writing), there still exists a very real risk for tanker operators to enter the region. War Risk Premiums and freight rates may begin to soften but will unwind more slowly than oil prices. Tanker operators still have the upper hand over charterers in terms of commanding high premiums to carry cargo due to the volatility in the region.