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Middle East crude shipping costs surge on higher freight rates and insurance premiums

Amid escalating tension and an expanded US and UK military naval presence, using armed guards to protect ships could be too risky in a powder keg environment in which a misunderstanding with another vessel might cause an unnecessary flare-up, maritime analysts and companies contacted by Lloyd’s List have said

Freight rates for modern tanker tonnage have soared almost 40% in the first market test for modern, very large crude carriers loading Middle East crude since last week’s attacks in the Gulf of Oman 

OIL companies face higher premiums to ship Middle East crude as freight rates surge and new charter agreements add hefty marine insurance costs to voyages.

But shipowners and maritime security companies cautioned owners and operators against paying for armed security guards to accompany any vessels transiting through the Strait of Hormuz, saying the risk of triggering a major international conflict was too high.

“Last done” freight rates for modern tanker tonnage soared 39% higher today in the first market test for modern, very large crude carriers loading Middle East crude since the June 13 attacks on two tankers in the Gulf of Oman.

Unipec provisionally agreed a rate of Worldscale 52 to load 270,000 tonnes of crude on very large crude carrier E Mei San from Saudi Arabia to China. That equates to around $2.6m for the voyage.

The 2010-built vessel is loading between July 1-3. A week earlier, Unipec paid W37.50 or $1.87m, for the 2017-built VLCC Leicester, loading in late June, shipbroker data shows.

Three VLCC fixtures disclosed to the market on Thursday specified charterers were to pay war risk premiums on the route, a rarely seen addendum.

War risk premiums have risen tenfold following the mystery explosions on two tankers, which left one ablaze and crippled another, amid escalating tension between the US and Iran.

The additional premium levied on war risk cover is now around 0.25 to 0.4% of the value of a VLCC, according to marine insurers surveyed by Lloyd’s List. That adds an additional cost of $171,500 to $274,000 for the voyage based on the price of a five-year-old VLCC.

Since May 24 — and after the May 13 attacks on four tankers off Fujairah — marine insurers have expanded the areas where they can charge additional premiums on war risk.  Incorporated are the waters off the United Arab Emirates, Saudi Arabia as well as the Strait of Hormuz and Gulf of Oman. Some 16.8m bpd of crude transits through the strategic energy waterway.

“Rates have increased some but not as much as many had thought or even hoped for,” said Oslo-based shipbroker Fearnleys in its weekly report.

VLCC owners have been asking much as W60 on the Middle East trading route to Asia, another shipbrokes said. That led to charterers picking off cheaper tonnage earlier this week, targeting older ships, any without oil company approvals, or those returning from dry-dock.

Today’s fixtures for modern tonnage have more than doubled VLCC time-charter earnings on the Saudi-China route from 2019 lows of less than $11,000 daily seen on May 9, according to Baltic Exchange indices.

While shipowners are paying higher costs for freight and insurance, leading maritime intelligence advisers caution against spending on armed guards to beef up security.

Armed guards too risky

Private armed guards were successfully deployed to deter Somali pirates several years ago. They embarked at strategic points in the Gulf and were present during the transit through waters where pirates operated, before disembarking and letting the vessel continue its voyage.

Unknown “state actors” are said to be responsible for explosions on six tankers targeted in the region in recent weeks. The US and its Middle Eastern allies have blamed Iran.

In the incident last month, divers deployed on fast boats are said to have attached limpet mines on four tankers at anchor off Fujairah, an investigation concluded. What caused explosions above the hull on the two laden tankers under way in the Gulf of Oman last week is disputed.

Amid escalating tension and an expanded US and UK military naval presence, using armed guards could be too risky, maritime analysts and companies contacted by Lloyd’s List said.

“It’s not necessary, there just needs to be increased vigilance,” said Protection Vessels International managing director James Hilton, a UK-based provider of armed and unarmed guards on board commercial vessels.

“There’s no requirement for armed guards to be on board.”

Vigilant crew on watch on the bridge and bridge wings is sufficient, he added, but acknowledged that additional, unarmed maritime security personnel could provide psychological comfort for the crew.

“You run the risk of a misunderstanding — and getting involved with a state-backed patrol boat is not going to end well for either the armed guards or the shipowner,” he said.

Crew would be better advised mounting additional watches including rear-facing watches, over a 24-hour period, to prevent boats coming alongside undetected and transiting threat areas during daylight hours where possible. 

That was echoed by Jakob Larsen, head of marine security at shipowner group BIMCO.

He advised shipowners to add extra look-outs and to dissuade attacks, and to use many of the same tactics to fight piracy such as lights on board, and sailing at maximum speed.

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