BREAKINGVIEWS-Hormuz closure is a physical, not financial, issue

By Robert Cyran

HOUSTON, March 26 (Reuters Breakingviews) - As conflict rages following joint U.S.-Israeli strikes on Iran, prices for oil and its transportation have leapt higher. So why aren’t owners of crude-carrying tankers crying Leeroy Jenkins and braving passage through the war-torn Strait of Hormuz to claim their fortune? The White House seems to think, at least in part, that it’s down to the availability of insurance. The reality is probably a lot more straightforward: it is very bad when a boat sinks.

At CERAWeek, the annual energy industry confab currently humming in Houston, insurance brokers say they’re still willing to cover the risk of war-related damage. Maritime owners just might not like the prices. Policy costs have increased to about 6% of a ship’s value, industry watchers say, compared to roughly 0.25% before the conflict. Somewhat surprisingly, large oil and gas facilities are similarly insurable, albeit likewise at a relatively stiff rate.

The U.S. administration focused on insurance as a key issue in the early days of the Iran conflict, with President Donald Trump promising a government-backed scheme that would cover all trade. A $20 billion reinsurance plan followed, with Chubb serving as lead partner.

Covering potential losses, however, isn’t the only – or even the main – problem. Financial recoveries are helpful, but if a vessel is knocked out of commission, its owner will be waiting a long time for a replacement.

The lead time for a new Very Large Crude Carrier, or VLCC, now extends to three years or more, based on a recent purchase. Yes, prices are tempting: A tanker from the Middle East to China can fetch nearly $400,000 a day, based on the TD3 benchmark. It's debatable whether this figure is illusory given thin market liquidity, but it would make for a sizeable return on ships that cost around $125 million new. Even if one of those ships goes down, its owner will be foregoing years of revenue.

Crews understand this risk-reward calculation even more than the carriers. Captains ultimately have a veto over whether they will put their colleagues, and themselves, in harm’s way. It is easy to gamble on a screen; risking one's life is another matter.

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CONTEXT NEWS

Iranian officials said on March 24 that "non-hostile" ships may transit the Strait of Hormuz in coordination with Iranian authorities. On the same day, President Donald Trump said the United States was talking to the "right people in Iran and they want to make a deal so badly". Since the United States and Israel launched strikes on Iran in February, few ships have passed through the Strait, which handled shipments equivalent to a fifth of global oil and gas demand prior to the conflict.