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Q&A: Shipping analyst on the lookout as Israel-Hamas war could spill-over into the industry if conflict escalates
By Melina Chalkia

Geopolitics have historically been the number one driver of the global shipping industry. With a potential escalation of the Israel-Hamas war in the Middle East and the potential participation of Iran, a major oil producer with vast reserves, comes a possible shift in oil and shipping demand.


In this interview, Douglas Mavrinac, the managing director and group head of the Maritime Equity Research Group at Jefferies, outlines how history and geopolitics can be useful guides in assessing the future of shipping. He explains how a wider war in the Middle East could result in ships taking longer trade routes, instead of the Suez Canal, thus increasing the demand for ton-miles and supporting higher freight rates.


Mavrinac’s work focuses on shipping companies that transport crude oil and refined petroleum products, as well as dry bulk commodities and containers. He has been recognized twice in the Wall Street Journal’s Best on the Street survey for industrial transportation sector.


The conversation has been condensed for brevity and clarity.

Q1: The Israel-Hamas war and the recent attacks in the Middle East have resulted in geopolitical instability in the region. Did you see an impact on the shipping industry?


A: Not yet. It would only be if it got worse. If it were to escalate and you start getting Iran more involved and others, then that could add incrementally to the inefficiency of the market.


Q2: Right now, it seems that fears for a wider spread of the Israel-Hamas war have faded. What do you expect to happen if the war does escalate?


A: Things seemingly haven’t spread but two days ago you had Houthis firing missiles or drone attacks on US warships. If it escalates, if all these Iranian backed proxies start getting more aggressive or more effective in some of their attacks, and if the US were to say “we’re going to restrict the amount of Iranian crude exports that can go to market,” that could have the same effect as restricting the Russian exports that went to the market.


Q3: How does this affect the global supply and demand for ships?


A: You can look historically at other conflicts in the Middle East, whenever production was disrupted, or exports were disrupted. I think Iran got into trouble maybe in the early 2000s, and the US cut off some of their exports. So, people had to go further away to source their crude.


All this stuff going through the Suez Canal from Iran, where is it going to come from now? Who has the spare capacity to satisfy Europe’s demand or the US demand? Even just the prospect of uncertainty makes people nervous, and they’re willing to pay up to secure supplies. Crude prices can go through the roof, because the supplies are reduced. Generally, all these sorts of things are good for shipping demand.


Q4: You also mentioned Russia, that something similar happened there after the Ukraine war. What was the effect of this geopolitical upheaval on oil tankers?


A: What happened was the EU said “we're not buying any more Russian crude or refined products that used to be piped in or shipped short distances, because we're funding the war effort against Ukraine. So, we're going to start importing from the US, from the Middle East.” That elongation of those trade routes was positive for shipping. Geopolitics have always had a positive effect on the ton-mile demand side of the shipping supply demand equation. Historically, this happens all the time. Therefore, if it happened with Russia, it could happen again, if things really go south in the Middle East.


Q5: In these cases, like the one in Russia, did the shipping industry recover?


A: The industry adjusts fairly quickly. While you had this Russian disruption, earlier this year you started seeing what they called a Dark Fleet develop. Ships that didn't care what UN requirements or bans were, they started servicing Russia. And all of a sudden, the inefficiency that didn't exist became more efficient again. The sector, over the long term, does regain its deficiencies, but there can be periods of time when those inefficiencies are quite good for ship owners, earnings etc.


Q6: Regarding the Israel-Hamas war, has there been any risk premium on the charters passing through the Suez Canal, since ports in the area are designated as “high risk”?


A: Generally, it goes into what sets the price. I’m willing to pay more to ensure my cargo gets to market. Shippers may say, “I’m not going over there because it’s too dicey unless you pay me.” It’s hard to quantify what that risk premium might be. But it does exist and should be inherent in the rates that you see.


Q7: How could economies outside the shipping industry be affected by a potential escalation in the Middle East?


A: It has an effect on the commodity price itself. If you start seeing a reduction in crude supply, crude oil prices go up. It starts to squeeze the economies, because more dollars are going towards refueling cars and energy costs. And crude oil prices are one of the key inputs into inflation. So, if crude prices go from 75 to 100, because things escalate in the Middle East, well then that can have a potentially detrimental impact on the economy, because then the Fed has to raise rates even more.

Q8: The OPEC+ meeting is coming up this month. Are you expecting any change in oil prices?


A: This is a huge wildcard. No one knows how that's going to go down – whether the Saudis are going to try to punish some of the people in OPEC that are cheating currently, or whether the 20% decline in oil prices over the last month is cause for them to say, “there's too much supply in the market, I want to see higher prices, so let me cut.” It’s a very volatile environment that we're in right now.

Q9: The shipping sector is also focusing heavily on sustainability. If things escalate and longer trade routes persist, could this affect carbon emissions and the industry’s efforts for decarbonization?


A: It totally could. What some guys are trying to do in order to offset that is to go slower. If you're driving your car at 80 miles an hour instead of 50. When you're driving 50, you're emitting less. But when you're driving 80, you're emitting a lot. And so that's one of the ways that they're trying to do it; the conveyor belt of deliveries is being elongated. That’s how people are trying to tackle what’s allowed from an emissions standpoint.

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