Middle East Crisis Could Lead To Short-Term Spike In Tanker Rates

- By Erin Koehler, July 14, 2006

As tension in the Middle East escalates, due both to the military conflict between Israel and Lebanon and to Iran’s continued defiance of the United Nations, the possibility of a regional crisis looms large. If either of these situations erupt into a wider war, particularly one involving Iran, it would have significant implications for the tanker market.

In particular, we would expect to see a dramatic spike in spot rates in the near-term, as importers rush to secure oil supplies. In fact, the fear of a deepening crisis is probably already encouraging a build-up in oil stocks, lending support to tanker rates. And if the conflict continues for more than a few days, we might also see a substantial increase in floating storage, as storage facilities on land fill to capacity. Specifically, if we were to see a repeat of what happened in the 1991 Gulf War, when roughly 30 VLCCs were used for floating storage, VLCC rates would likely spike above $100,000 per day in the near-term.

But the longer-term impact of a conflict involving Iran or another major oil producer is likely to be very negative. A disruption to oil supplies would likely send oil prices above $100/bbl as there is relatively little global spare production capacity. And if this lasts for more than a few weeks, we fear the global economy could weaken substantially due to the prolonged impact of high oil prices, and tanker demand would suffer as a result.