The latest attack on the Saudi oil installations will push up the war risk insurance, thereby increasing the total cost of deliveries as freight rates also have an upside potential amid likely change in the pattern of trade flows, market participants said Monday.
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"An incident of this scale would, although not directed at maritime assets, most likely have an impact on the additional war risks premiums," Svein A. Ringbakken, managing director, Den Norske Krigsforsikring for Skib, or DNK, told S&P Global Platts. It is the world's largest provider of maritime war risk cover, insuring over 3,000 ships for more than $217 billion.
At any given time, between 30 and 40 ships operating in the Middle East region are insured by DNK.
"The biggest headache is the AWRP, higher numbers will now be quoted by the insurers," said a senior executive of a Middle Eastern tanker owner.
He pointed out that unlike crude prices, which are in the public domain and change by the second, AWRPs are negotiated privately and vary from ship to ship, depending on age and notional value.
Until recently, some owners did not mind having a higher value recorded for their ship, with an eye on the secondhand sale market. However, this now implies coughing up a higher amount as AWRP.
While owners are striving to pass on the AWRP to charterers, they are resisting and contending that beyond a specific amount, it should be shared by both.
War risk insurance rates for ships operating in the Middle East had already increased tenfold since the attacks on tankers in May, Ringbakken said last month in Singapore.
"Oil tankers transiting the area can pay up to $300,000-$400,000 in war risk premium to transit the Strait of Hormuz and operate in the region," he said.
Market participants say it may now increase further.
"Underwriters will now see increased risk. A successful attack on Saudi installations deep inside the country is a big insurance event," said Masood Baig, director, Straitship Brokers, a Singapore-based tankers' brokerage.
He pointed out that the attack was well inland, away from Yemen and points to serious threats to the Middle East's oil economy.
DEMAND FOR TANKERS
As crude prices rise, demand will soften and there will be a negative impact on the tankers market, Baig said.
Nevertheless, if countries start to build inventories, it may actually push up rates.
Refinery purchasing managers are now thinking of inventory building and securing supply, said Jo Ringheim, an Oslo-based research analyst with Arctic Securities.
Oil will be harder to come by and will have to travel farther from the US, Brazil and Russia, Ringheim said in a daily report. In such a scenario, the opportunity cost of being uncovered on transport is bound to rise, hence pushing rates higher and available tonnage lower, he said.
The short-term result could be a surge in tanker rates but a continued and not substituted loss of crude exports from Saudi Arabia would be a setback for the tanker market in the medium term, Ringheim said.
ALTERNATIVE SOURCES FOR PRODUCTS
Saudi Arabia aims to restart part of the damaged facilities Monday and the rest in the next few days, but getting back to full capacity may take much longer, sources said.
Saudi Arabia is not only a major exporter of crude but through its trading arm also supplies large volumes of jet fuel and gasoil to Europe and Africa and naphtha to East Asia.
If Saudi Arabia is unable to meet its export commitments in the coming months, oil products will have to be alternatively sourced from other origins in the region and also India, said a product tankers' chartering executive.
Saudi Arabia may prioritize crude shipments and refine fewer products for export, which could result in fewer shipments from the Persian Gulf and dragging down freight rates for product tankers, the executive said.
However, in the short term, its trading arm, ATC, may cover the immediate requirements from the vicinity and push up demand for short-haul voyages within the Middle East, thus supporting rates, he said.
--Sameer C. Mohindru, firstname.lastname@example.org
--Edited by Jonathan Fox, email@example.com