Rates for Medium Range (MR) clean product tankers could face competing drivers in the coming weeks, as possible disruption around the Bab el-Mandeb strait at the southern entrance to the Red Sea could force vessels onto longer routes, while tighter European gasoline balances reduce export volumes.
Yemen's Iran-backed Houthi militant group has announced a ban on Saudi Arabian "maritime navigation", although the scope of the restrictions remains unclear.
Saudi diesel exports from Red Sea ports have become an important source of supply for Europe since March. More than 2mn t/month has loaded from Saudi Red Sea terminals, with around one-third heading to Europe, according to Vortexa.
Any disruption to traffic through the Bab el-Mandeb strait could increase the share of Saudi diesel exports heading to Europe, as cargoes destined for Asia may face longer and costlier routes. Cargoes moving west from Saudi Arabia's Red Sea coast can still reach Europe through the Suez Canal, while eastbound shipments would likely be diverted around the Cape of Good Hope.
The longer voyages would increase demand for both MR and long range (LR) tankers, supporting freight rates.
At least five tankers heading to or from Saudi Arabian Red Sea ports appeared to have turned around today, although an India-origin clean product tanker passed through unharmed. The Houthis have not carried out any strikes on shipping since announcing the ban, and the situation is still developing.
If attacks start, shipowners sailing from Indian or other non-Saudi ports may become more reluctant to use the Bab el-Mandeb strait. The Houthis have previously widened their target list after initial attacks.
A diversion around the Cape of Good Hope for a west coast India-Rotterdam voyage would add around 15 days. An LR2 tanker burns around 40t/d of bunker fuel and costs around $30,000/d to charter, implying additional costs of at least $800,000, or around $8.85/t.
But it is unclear if the ban will target only Saudi-linked vessels or wider commercial traffic. Other vessels transiting the Bab el-Mandeb strait may not face Houthi attacks if they are not linked to Saudi Arabia, one additional war risk premium (AWRP) insurance broker told Argus today. The Houthis have said only Saudi maritime traffic is in their crosshairs, suggesting cargoes not originating in or heading to Saudi Arabia may avoid any aggression, the broker said.
AWRPs are currently around 0.2pc for cargoes and 0.5pc for hulls operating between the Eritrean border and the Saudi port of Jizan, the broker said. AWRP cover does not apply to other Saudi ports north of Jizan, they added. Premiums are expected to rise, but remain well below those for transiting the strait of Hormuz because of the greater threat posed by Iranian strikes on vessels.
"One's a kitten and one's a tiger," the broker said.
The European MR market has been under pressure in recent weeks. Competition from Brazilian buyers for US Gulf cargoes, weak US Gulf-Europe transport economics and reduced diesel export availability have weighed on cargo volumes and pushed MRs towards shorter-haul trades.
Tighter gasoline balances could also limit support for MR rates. Strong seasonal demand and falling inventories have tightened Europe's gasoline market. If refiners prioritise domestic supply over exports, freight demand could weaken and offset some of the support from longer Red Sea-Europe diesel flows.
The UK Continent-US Atlantic coast MR rate fell to WS130 ($21.53/t) on 21 July, its lowest since 7 July, while the west Africa route dropped to WS180 ($34.60/t), also its lowest since 7 July. Both remain well below their peaks of WS317.5 ($52.58/t) and WS445 ($85.53/t) reached on 10 April, just over a month after the outbreak of the US-Iran war on 28 February.
