They all said Hormuz closure would be brief. What if they were wrong? An analysis of Greg Miller

//Greg Miller//

FOR MANY years, shipowners on panels and quarterly calls have been asked: What happens if the Strait of Hormuz closes? The response was almost always the same: If it ever happens, the closure will be brief, because the world cannot afford for it to be long.

 

Now that the strait is effectively closed, this response looks like a failure of imagination. An extended closure — from a practical, commercial perspective — now seems plausible.

 

War risk insurance costs for a Hormuz passage are high, as was the case during the Red Sea crisis. And more immediately, the risk to seafarers and vessel assets is extreme; Iranian attacks on commercial shipping are ongoing.

 

The Strait of Hormuz, Gulf of Oman and Persian Gulf were designated Warlike Operations Areas under crew contracts on Thursday, meaning seafarers “instructed to enter [the WOA] have the right to refuse to sail and request repatriation at the company’s expense”, said the International Transport Workers’ Federation.

 

There will always be some ships passing through danger zones — there continues to be a trickle through the Strait of Hormuz — but the question from a broader market perspective is when transits can resume on a large scale.

 

For that to happen, crew would have to agree to sail there, owners would have to be comfortable with the risk to their crew and assets, and charterers would have to be willing to pay the high freight, including the additional insurance.

 

Lessons from the Red Sea crisis

The Red Sea crisis offers a recent example. A large majority of shipowners continued to avoid the Red Sea route until the Houthis declared it safe, and even then, most refrained from returning.

 

The US military’s attacks on the Houthis in March-May 2025 did nothing to bring commercial traffic back.

 

The US Navy “spends very little time at a strategic level understanding the pressures and demands of the commercial maritime economy”, said Joshua Tallis, advisor to the chief of naval operations at the Center for Naval Analyses, at the Hellenic American-Norwegian American Chambers of Commerce conference on February 10.

 

Regarding the Red Sea crisis, he said, “From a Navy standpoint, the sort of kneejerk instinct was to say, ‘Well, we’re shooting down missiles, the odds on an individual ship getting hit are actually relatively low, so we’ve solved the problem, right?’ The US Navy doesn’t really have the domain expertise on the pressures from maritime insurance rates and war risk insurance.”

 

Three weeks before the Middle East war broke out, Tallis said, “With scenarios like Iran, the Navy understands, at the top line, that the Strait of Hormuz is a critical chokepoint for the movement of oil.

 

“But from a narrower standpoint — is there a backup plan in the wings similar to the 1980s tanker wars? — to me, that is a much less central part of how the Navy thinks of its primary mission, which is: in the event of a war, to win the war, not protect the [shipping] folks in this room.”

 

Amid the 1980s war between Iran and Iraq, the US military provided escorts for tankers reflagged to the US during Operation Earnest Will.

 

On Tuesday, US President Donald Trump ordered the US Development Finance Corporation to provide insurance and guarantees for all ships sailing through the strait, and said that the US Navy would begin escorting ships “as soon as possible”.

 

“Given concerns about the safety of crews and vessels moving through the strait, addressing the insurance issue will likely not be sufficient to meaningfully increase traffic,” wrote Evercore ISI policy analyst Sarah Bianchi in a client note on Tuesday.

 

She added, “Adding navy escorts would be a massive undertaking that would also increase US exposure to Iranian threats.”

 

Escalating threat to oil production

 

There are strong parallels between Red Sea crisis and the Strait of Hormuz closure in terms of the commercial realities that dictate transit behaviour.

 

But there is a crucial difference: the Red Sea is an “open” chokepoint; ships can go around it using the Cape of Good Hope.

 

Hormuz is a “closed” chokepoint. The crude, products, liquefied natural gas and liquefied petroleum gas inside the strait is effectively shut in. The exception is that some Saudi Arabian crude can be moved via pipeline to the Red Sea.

 

With every passing day, the closed nature of the Hormuz chokepoint increases the market disruption risk, because oil Middle East Gulf producers are running out of storage. When storage fills, they will have to shut down production, which will take time to restart.

 

Qatar fully shut down its LNG operations on Wednesday, representing around 20% of global LNG supply. According to Reuters, Qatar’s LNG operations would take two weeks to restart, and another two weeks to get back to full production.

 

Iraq, Opec’s second-largest producer, began shutting down some of its field operations earlier this week.

 

“We are already seeing production shut in,” said Vortexa chief economist David Wech in an online presentation on Tuesday. “The closure of the Strait of Hormuz is already more dramatic than I would have thought — and every day counts.”

 

Spot indexes at unprecedented levels

 

The crude tanker market was in the midst of its strongest boom since the mid-2000s even before the Middle East war. The conflict has brought rates much higher, to historically unprecedented levels.

 

The caveat is that the index numbers are theoretical for voyages that would load inside the Strait of Hormuz. The Baltic Exchange said on Wednesday that index panellists are “using their professional judgement” in cases “where no direct fixtures are available”.

 

The situation is so extreme in the LPG sector that the Baltic has halted daily publication of its BLPG1 index and moved it to weekly. That index assess very large gas carrier rates from the MEG to Japan.

 

In the crude sector, there are still VLCCs loading outside of the strait — at the Red Sea terminus of Saudi Arabia’s East-West Pipeline — allowing for comparable rate estimates.

 

The Tankers International pool reported that Adamantios (IMO: 9905447) was fully fixed by Reliance on Thursday for a voyage from the Red Sea to the west coast of India with a March 18-22 laycan at $537,913 per day.

 

Kalamos (IMO: 9560766) was put on subs by Bharat Petroleum Corp for the same voyage, with a March 22-24 laycan, at $757,772 per day.

 

The Baltic’s TD3C index, assessing time-charter equivalent VLCC rates from the MEG to China, was at an all-time high of $485,959 per day on Thursday.

 

The TD2 MEG-Singapore was even higher, at $507,709 per day.

 

(Courtesy: Lloyd’s List )