Oil tankers stuck at sea

More than twenty-two merchant ships, twelve of them ultra-large crude carriers and eight of them container ships, are still at anchor and going nowhere across the northern Indian Ocean. Their holds contain billions of dollars of cargo that cannot be delivered, a plain sign that the Hormuz crisis has not yet ended at sea.

Idle ships, frozen money

A modern VLCC is worth about $120 million, and its two million barrels of crude are worth roughly another $200 million. With twenty-two ships stuck, more than $7 billion of capital is frozen and nearly two per cent of the world's commercial tanker fleet is out of use. Owners are paying tens of thousands of dollars a day in demurrage, fuel and crew costs while their ships sit still.

That capital is borrowed, and the interest keeps running. Shipowners typically finance hulls with secured bank loans or leases, and the cargoes on board are usually funded by trade finance, with a commodity trader drawing on bank credit lines against letters of credit. A cargo that should have been delivered and paid for within weeks now sits on the balance sheet indefinitely, tying up credit lines that the trader would otherwise use for the next shipment. At today's short-term interest rates the carrying cost is far from trivial.

Who pays for the wait

The bill for idle time is settled by contract, and the contracts were not written with a closed strait in mind. Under a voyage charter the charterer pays demurrage once the agreed loading or discharge time runs out, which pushes the cost onto the oil company or trader that hired the ship. Standard war clauses, however, allow an owner to refuse to enter a zone that has become dangerous, and a ship waiting outside such a zone is in a legal grey area that lawyers will argue over for years.

Time charters shift the risk the other way. A charterer who hires a ship by the day keeps paying hire unless an off-hire clause applies, so oil majors and traders with fleets on time charter are carrying the cost of every idle day themselves. Insurers are the third party at the table. Hull and cargo policies usually exclude war risks, which are covered separately, priced per voyage and cancellable at short notice, so the owner of a ship at anchor can find its cover repriced or withdrawn while the vessel has not moved an inch.

Trapped fleets have been here before

The nearest precedent is not encouraging. When the Suez Canal closed during the war of 1967, a group of cargo ships was trapped in the Great Bitter Lake and did not leave until the canal reopened in 1975. The crews became a small floating community and the owners spent years in disputes with insurers. Nobody expects a repeat on that scale, since ships waiting outside the Gulf can at least sail away, but the episode shows how quickly a temporary disruption can harden into years of litigation.

The Tanker War of the 1980s is the other reference point. Iran and Iraq attacked shipping in the Gulf for years, and traffic kept moving only after the United States agreed in 1987 to reflag Kuwaiti tankers and escort them with warships. Owners returned when governments took on part of the risk, not when diplomats announced progress.

Refineries run short

Refiners and manufacturers waiting for the crude and components on board have seen their just-in-time schedules thrown into disorder. Several Asian refineries have had to idle hydrocrackers because cargoes of Gulf crude never arrived. Many of those plants were built to run medium, sulphurous Gulf grades, and the replacements on offer from the Atlantic basin tend to be lighter and sweeter, which changes the yield of diesel and fuel oil a refinery gets from each barrel.

Distance compounds the problem. A cargo from the American Gulf Coast or West Africa takes weeks longer to reach North Asia than one loaded in the Gulf, so every substitute barrel ties up more ship-days. That absorbs tanker capacity at exactly the moment a slice of the fleet is sitting idle, and it lifts freight rates for any vessel free to trade.

Winners outside the strait

The disruption has clear beneficiaries. Tanker owners whose ships are trading elsewhere are earning more for every voyage, because two per cent of the fleet has vanished and the remaining ships are sailing longer routes. Crude exporters in the Americas and West Africa have found eager buyers in Asia, and container lines with spare vessels can charge more to the manufacturers who need parts urgently.

The losers are concentrated. Owners of the stuck ships earn nothing while their costs run on. Cargo owners carry both the price risk and the financing cost for as long as their barrels stay unsold. Asian refiners without long-term supply contracts from outside the Gulf are paying up for replacement crude and running their plants at reduced rates.

The case for waiting it out

The counterargument is that the stranded cargoes are a store of value rather than a loss. The crude has not been destroyed, and if prices rise further while the ships wait, the owners of the oil will sell it for more when the strait reopens. Some traders deliberately hold crude at sea when markets reward storage. That logic works only in contango, however, when later delivery commands a higher price. In a tight, backwardated market the cargo owner is paying to hold an asset whose forward value is lower than its spot value, so waiting costs money twice.

What would free the ships is also clear. War-risk underwriters will want binding guarantees and physical protection before they cut premiums, and owners will not sail without cover. A naval escort regime or a verified ceasefire would count; a diplomatic statement would not.

Until those ships move, Asian refiners will keep running below capacity and owners will keep paying to sit at anchor, and some cargoes may not be delivered for months. The owners and traders who financed those cargoes will feel it first, in the second-quarter results due this summer, and Asian refining margins will stay squeezed until escorts or signatures arrive.