Strait of Hormuz Traffic May Never Be the Same Again
With Friday's announcement from the Iranian Foreign Minister that the Strait of Hormuz is open to all commercial ships during the ceasefire, and the subsequent confirmation from President Trump, equities rallied and oil prices dropped aggressively. In fact, more than 20 ships that had been held up within the Persian Gulf are now transiting the strait, temporarily ending the blockade that had frozen logistics lines for over a month. However, the opening of the strait is only in effect while the ceasefire holds—not only between the United States and Iran, but also between Israel and Lebanon. President Trump stated that the U.S. will keep the blockade of the Strait of Hormuz in place until a deal with Iran is finalized. Although there are still some major hurdles all parties need to work out, it is at least a start, and it also alleviates the humanitarian crisis that was taking place within the Persian Gulf, where a significant number of merchant mariners were essentially stuck at sea.
Shipping company Maersk provided a cautious statement around the announcement: “We have noted Iran's announcement on the Strait of Hormuz. The safety of our crew, vessels and customers' cargo remains our priority." German shipping company Hapag-Lloyd also noted, "If all open issues are cleared (i.e. insurance coverage, clear orders of Iranian government/military about exact sea corridor to be used and the sequence of ships leaving) we would prefer to pass the strait as soon as possible."
I'm sure we are all happy about this temporary resolution, but if the past gives us any indication of what may happen in the future when it comes to the Strait of Hormuz, it may not see the same traffic flow as it did pre-conflict. That may sound hyperbolic, but we have a recent example that reflects the impact geopolitics can have on logistics routes and maritime insurance rates and policies.
In November of 2023, the Iranian-backed Houthi militia began striking commercial vessels near the Bab El-Mandeb Strait, a key access point for ships transiting through the Red Sea. This escalation immediately impacted shipping routes, with relatively dramatic effects on energy and global trade. The reason this event is comparable to the current situation is that insurance rates ramped up dramatically, and in most cases insurance companies did not want to cover tankers and cargo ships at all. As a result, shipping companies began using a longer route around Africa via the Cape of Good Hope off the coast of South Africa. Even after the escalation was resolved, shipping traffic has not returned to pre-escalation levels. In fact, traffic through the Bab El-Mandeb Strait is still down 40%, while ship arrivals at the Cape of Good Hope (the alternative route) are up around 143% since the Red Sea conflict began.
That said, there are several differences to note between these two conflicts, and the most important is that the Red Sea situation had an alternative route—it took longer and cost more, but shipping companies adjusted their logistics to reduce risk. The Strait of Hormuz does not have many alternatives yet, but we may begin seeing a significant increase in pipeline projects that would allow several different avenues to transport energy products.
For now, ships are making the effort to transit the strait, and the market will adjust as these new dynamics potentially create permanent logistical shifts. Even if it comes at a higher cost, in the end the market will work toward diversifying its risk away from this waterway.
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