Oil tanker insurance costs to jump after Gulf attacks

Tensions in the region are at the highest they can be without an actual armed conflict, says a top shipping association.

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    Intertanko, the biggest trade organisation for oil tanker owners, said it is 'extremely worried' about the safety of crews in the region [File: Simon Dawson/Bloomberg]
    Intertanko, the biggest trade organisation for oil tanker owners, said it is 'extremely worried' about the safety of crews in the region [File: Simon Dawson/Bloomberg]

    The cost of insuring tankers to ship Middle East crude will increase after a second spate of attacks on vessels in the region in just over a month.

    Two oil tankers were attacked in the Gulf of Oman on Thursday, just 32 days after four other carriers were targeted nearby. The region was designated as a listed area after those incidents, a classification that gives underwriters room to charge more.

    DNK, the mutual insurer that covered one of the ships damaged Thursday, will increase its rates for war insurance, according to a person familiar with the matter. Rival insurer Hellenic War Risks Club will probably increase a so-called additional premium that owners pay when sailing to the Persian Gulf with immediate effect, according to a notice on its website.

    Hormuz oil flows chart Bloomberg
    The Strait of Hormuz is the world's most important shipping channel for oil [Bloomberg]

    Nobody has so far taken responsibility for the recent incidents, which happened near the Strait of Hormuz, the world’s most important oil choke-point, handling about 35% of the global seaborne trade. The U.S. suggested that Iran, which is under tough American sanctions, was linked to last month’s attacks.

    DNK insured the Norwegian-owned Front Altair for the full value of the vessel, according to the person familiar. A ship of that tanker’s size is worth between $30 million and $50 million, according to another person with knowledge of the matter. Insurers provide war policies that pay out the value of ships damaged or destroyed by acts of both terrorism and war. The Front Altair’s cargo of naphtha would be insured under a separate policy.

    Industry Response

    Some owners appear to be "taking a breather" when it comes to accepting charters from the Middle East while they evaluate the risks of lifting oil from the region, according to Halvor Ellefsen, a shipbroker at Fearnleys in London.

    Shipping companies should consider diverting vessels from the area where the two vessels were attacked Thursday, industry group BIMCO, the largest international shipping association for owners, said in a security advisory to its members. Tensions in the Strait and the Gulf are now at the highest they can be without an actual armed conflict, the group said in a separate statement.

    Japan’s Mitsui OSK Lines Ltd. has ordered ships it operates in the area to keep a 12-mile radius from the zone where the two tankers were attacked, a company spokesman said on Thursday evening.

    Intertanko, the biggest trade organization for oil tanker owners, said it is "extremely worried" about the safety of crews in the region. It also said two of its members suffered explosions at or below the water line in what the group described as an attack.

    Rare Disruptions

    Escalations that disrupt Middle East oil supplies are relatively rare. The Iran-Iraq war coincided with a big slump in OPEC oil output in the first half of the 1980s. That conflict saw tankers destroyed as the two countries tried to damage one another’s economies.

    By contrast, Iraq’s 1990 invasion of Kuwait, and the Gulf War that followed, were a long way from Hormuz and had a relatively small impact on flows through the Strait, with Saudi Arabia replacing much of the lost Iraqi and Kuwaiti crude.

    In the short-term the rates for chartering ships in the Middle East could rise as some owners consider avoiding the region, lowering supply, JPMorgan Chase & Co. analyst Noah Parquette wrote in a report.

    Shares of tanker companies responded bullishly, suggesting a view among some investors that the tensions could drive up freight rates. Frontline Ltd.- the owner of the Front Altair - led the way, rallying as much as 11% in Oslo on Thursday.

    SOURCE: Bloomberg