The Real Oil Tax Hits EVERY Barrel

Sometimes, no matter how much military power you put behind a naval escort, you just can’t account for everything. 

We learned that lesson in 1987, when the first American-escorted convoy steamed up the Persian Gulf. 

A few of the older heads in our investment community might remember this event, when Kuwait had asked Washington for help because its tankers kept getting attacked. 

So, we put the might of the American navy behind those Kuwaiti tankers in order to provide safe passage. 

The lead ship in that convoy was named the Bridgeton, a 414,000-ton capable of hauling up to 3.7 million barrels of oil at full capacity. 

Safety felt all but assured with U.S. warships guarding it.  

Then, the Bridgeton hit a mine. 

As you might expect, the explosion tore a hole into the ship. Luckily, the Bridgeton remained afloat and was able to limp onward. 

That day, everyone in the oil industry learned a valuable lesson — one that we’re re-learning today. 

I’ve been thinking about the Bridgeton incident since last Saturday, when the IRGC reported that two oil tankers had struck mines in the Strait of Hormuz. 

Both caught fire, and each reportedly carried about 2 million barrels of crude. Now to be fair, the incident wasn’t independently confirmed, and you know as well as I do that both sides of the conflict are desperate to control the media narrative. 

However, we also know that all it takes is one headline to rattle oil markets. And not surprisingly, Brent crude prices quickly climbed over $110 per barrel. 

There’s also another impact these stories have had, one that most people tend to overlook. 

OPEC+ recently told the world that shipping and insurance costs have officially reached levels never seen before. 

Today, the cost to ship a barrel of crude out of the Middle East can cost as much as one-third of the cargo’s value. 

So much for cheap oil anytime soon. 

The Real Hormuz Blockade (Spoiler: It’s Not Drones!)

If you don’t know how this actually works, it’s simpler than it sounds. 

Look every time a tanker enters a war zone, its owner buys war-risk insurance for the trip. 

Naturally, the price is a percentage of the ship’s value, and it’s set for a few days at a time, then reviewed on a daily basis. 

Before the war began on February 28th, that charge on a Hormuz transit was about 0.25% of a vessel’s hull value. 

Depending on the week and who you ask, those quotes over the last two months have run between 3-9%, and hit a peak around 10%

Let’s use a $150 million tanker for example. Prior to this war, a trip through the strait cost roughly $375,000 in premium. 

At 10%, the same 7-day trip costs $15 million.

And that’s just the insurance. 

Remember, the owner still needs to pay the crew, burn the fuel and make a profit. So the charter rate goes up, and the oil gets more expensive for whoever is waiting at the other end. 

In fact, the IEA put Gulf-to-Asia freight at about $36 a barrel in early October. 

For the record, that’s more than five times what it cost before the war.

This volatility spreads, too. 

Despite the Saudis setting up their East-West pipeline to bypass the Strait of Hormuz (as best they could), it wasn’t long before drone attacks spiked premiums for tankers loading at Yanbu. 

Those premiums grew from under 1% in early July to about 3% by late September. Ports farther south have been quoted at up to 7%. I’ve even seen reports that estimated the cost of a Yanbu voyage had gone from at least $100,000 before the war to about $3 million.

I know, I know… the oil flows out of the Middle East are coming back, right? 

Well, I guess that depends which source you’re trusting. 

It’s clear that a good chunk of crude supply is getting out of the Strait of Hormuz, but we’re still nowhere near pre-war levels. 

Kpler data (reported by Reuters) showed about 11.6 million barrels a day moving through Hormuz in the week to October 13th; count that against a baseline of about 17.1 million. So, we’re only looking at about two-thirds, which may be better once the numbers are revised later down the road. 

The problem is that insurers don’t price volume. They also factor in the chance of losing a ship, and last week’s mine incidents are a harsh reminder of the risks that’re still in play. 

Keep in mind that the rules for bringing premiums back down are strict. 

Why? Well, the London market’s high-risk listing for the Gulf comes off only after sustained incident-free passage, a settled geopolitical situation, and verifiable proof that the mines are cleared. 

And no, NONE of those have happened yet. 

As if that isn’t scary enough of a thought, one reinsurer has warned that the repricing is likely permanent. 

So much for cheaper oil in the nearterm. 

The barrel isn’t the bottleneck, dear reader, it’s the insurance bill. 

Trump Blinks… Again?

Back in June, we talked a little bit about a dark fleet of oil tankers that were hiding in plain sight.  

I know you’ve heard of them, they’re the old, secretive tankers that move sanctioned oil from Russia, Iran and Venezuela. 

At the time, Western navies were boarding and seizing them, and registries were dropping them. 

The whole system looked like it was shrinking under its own weight.

So you can imagine our reaction when a U.S. official recently revealed that the Trump administration was ready to ease sanctions on some of those same ships.

The idea is to let legal oil (meaning crude and fuel that isn’t itself sanctioned) be shipped on tankers that were blacklisted. Granted, shippers would need Treasury approval, but at this point President Trump is willing to try anything to bring down crude prices. 

And in order to do that, he needs to address the record freight costs. 

We can’t help but ask who ends up capitalizing when transporting crude gets this expensive. Well, the answer is it’s those drillers who don’t have to send their barrels across the globe and through a war zone in order to get paid. 

Fortunately, there’s one major oil patch that is taking full advantage of this citation. 

Soon, I’ll show you exactly where to find the biggest winners in this new era of high oil prices. 

Stay tuned.