WASHINGTON: President Donald Trump says the United States will ensure the free flow of energy through the Persian Gulf with insurance guarantees and even naval escorts. But the shipping industry sees it – at best – as only a partial solution to a historic crisis.
“While President Trump’s comments about insurance and tanker escorts caused a pullback in oil prices, we question how much planning has been done on the insurance backstop thus far and think there could be a number of challenges in executing this plan quickly,” RBC Capital Markets LLC analysts said in a note.
US and Israeli strikes on Iran over the weekend have triggered a spiralling regional conflict and multiple attacks on vessels have now effectively closed off the Strait of Hormuz. With ships unable or unwilling to transit the Strait, producers cannot export, supertanker costs are skyrocketing and storage at many Persian Gulf refineries is filling up fast.
The world’s largest insurance mutuals have withdrawn war risk insurance cover for ships in the area.
“The core thing shipowners are thinking about is the real risk of loss,” said Karnan Thirupathy, partner at Kennedys Law LLP who specialises in the commodities, shipping and insurance sectors.
“No one goes into the trade if the risk of loss is simply too high.”
The effects have been swift. Iraq, the biggest Middle Eastern oil producer after Saudi Arabia, has already begun huge cuts to output and faces even deeper reductions, in the clearest sign yet of stress on suppliers in the region.
Trump’s solution involves tapping the US International Development Finance Corp – an institution that typically helps the private sector to provide finance for developing countries – to support charterers, shipowners and key maritime insurers. Trump’s announcement did pare some oil price gains on Tuesday, but with limited details on hand, shipowners said they were cautious about both the insurance provision and the cost. — Bloomberg
