Iran's latest attack on oil tankers has threatened an innovative trading method that has grown rapidly in recent years as one of the main ways to remove crude oil from the Persian Gulf, known as "shuttle runs".
"Shuttle Runs" Method Becomes the Savior of the UAE Economy
This trading method has been a vital lifeline for countries such as the United Arab Emirates (UAE) throughout the war. Despite the deaths of two crew members on Tuesday, a source familiar with the position of the UAE, which controls most of the shuttle transit, said the country still intends to continue the activity without changing its existing policy, although each crossing will be assessed separately.
At least one shipowner involved in the trade said they would not transit the Strait of Hormuz for now, while another is waiting for developments before making a final decision.
Insurance Costs Soar, Ship Crews Refuse to Sail
Brokers in the London insurance market, the world's main hub for maritime risk policies in war zones like Hormuz, reported a sharp drop in insurance coverage inquiries. Some shipowners are facing quotes of up to 7 percent of their ships’ value, equivalent to $7 million for a $100 million tanker.
The Secretary-General of the International Maritime Organization (IMO), Arsenio Dominguez, also warned shipping companies not to risk transiting the Strait of Hormuz for now, given the volatility of the current situation.
US Attacks Continue, Peace Deal Nears Collapse
The United States launched another series of airstrikes on Iran on Wednesday, marking the fifth consecutive day of attacks. The 90-minute operation targeted missile storage and launch sites on Greater Tunb Island near the strait.
The US-Iran interim peace deal signed about a month ago is almost completely collapsed, following disputes between the two sides over control of the vital passage. The Iranian military has insisted that the Strait of Hormuz will remain closed until the United States accepts Iran’s legitimate system for governing the strait.
Impact on Oil Prices
Brent crude oil prices rose for a third straight day on Wednesday, surging above $85 a barrel, bringing their weekly gain to 13 percent. About half of the 300 or so ships that passed through the strait last week were also patrolled by US forces.
For the Ringgit, the prolonged uncertainty in Hormuz and the continued rise in oil prices have the potential to add to the country’s energy import cost pressures. As long as alternative methods such as shuttle runs are also threatened, global oil supplies are expected to be tighter, maintaining risk-off sentiment in the forex market that usually supports the strength of the US dollar against regional currencies.
Key Takeaways
The Iranian attack on the tanker threatens the “shuttle runs” trading method that is the lifeblood of the UAE’s oil exports.
Maritime insurance costs jumped by up to 7 percent of the value of the ships, while the IMO issued its highest security warning since the June agreement.
The US launched its fifth consecutive attack on Iran, targeting military facilities near the Strait of Hormuz.
Brent crude oil prices rose 13 percent this week, above USD85 per barrel, as the conflict continued to escalate.
The prolonged Hormuz uncertainty has the potential to add to the cost of energy and weigh on the Ringgit through risk-off sentiment in global markets.
As long as both sides accuse each other of violating the terms of the peace agreement, markets are expected to continue to closely monitor any developments in the Strait of Hormuz, given its far-reaching impact on energy supplies and global economic stability.
