The Daily View: Middle East Gulf indexes at a crossroads

HOW much does it cost to ship a crude cargo from the Middle East Gulf to Asia, running the gauntlet through the Strait of Hormuz?

This question is much harder to answer than it was a few weeks ago, given renewed hostilities between the US and Iran.

US Central Command claimed as recently as Tuesday that “the Strait of Hormuz remains open for commercial transit”.

But it’s the tanker market, not CENTCOM, that decides whether the strait is commercially open or closed.

The market does so by weighing the evidence, which shows three tankers struck by Iran in the past four days, and the market has spoken: west-of-Hormuz VLCC fixture activity has evaporated yet again.

Fixture illiquidity creates unprecedented challenges for TD3C index panellists charged with answering the question: How much does it cost to book a very large crude carrier from Ras Tanura to Ningbo?

If you’re a journalist or analyst, and you don’t believe the TD3C reflects the real freight market, you can just ignore the index and focus on other benchmarks.

The market coverage of Lloyd’s List ceased featuring the TD3C in its VLCC rate reports for much of the Hormuz crisis period, focusing instead on the Atlantic basin indexes.

If you’re a trader of TD3C forward freight agreements, or you time chartered a VLCC on a contract linked to the TD3C, you can’t ignore the index. A lot of money is at stake.

The Hormuz crisis has now lasted almost five months, and the MEG tanker market may not return to pre-crisis conditions for many months to come.

The longer this drags on, the more pressure will build on the Baltic Exchange to adjust the methodology of the TD3C and other MEG tanker indexes. The Baltic acknowledged this on Tuesday and sought feedback on two possible options.

The first option would replace inside-Hormuz load ports with outside-Hormuz load ports. That would remove the Hormuz transit risk premium, and these indexes would no longer reflect what they did before. They would be MEG indexes in name only.

The second option would also use outside-Hormuz load port assessments but would add an adjustment factor to simulate the transit risk premium.

There will be criticisms of the adjustment factor calculation, given that it would be derived from the same MEG assessments that many deem too hypothetical.

But the MEG indexes would still strive to reflect MEG voyages, however imperfectly, which makes sense if you believe that someday, this tanker market will return to some semblance of normalcy.

Greg Miller
Senior maritime reporter, Lloyd’s List