The longstanding tensions between Israel and Iran have escalated following Israel’s strike on an Iranian diplomatic facility in Damascus, Syria – a key hub for Iranian military coordination in the region. This prompted a direct response as Iranian missiles struck major Israeli cities on Monday. What was once a proxy conflict has now shifted toward open confrontation, as Israel announced it was targeting nuclear and missile facilities in Iran. 

Military operations affecting global trade and shipping
While the full extent of the conflict’s impact on global trade remains uncertain, the maritime industry is already experiencing its effects. The airstrikes have led to increased jamming of the signals of vessels operating in the Middle East, the world’s largest oil-producing region. GPS, which is essential for safe navigation and vessel tracking, is affected, making it difficult to monitor vessel movements. This can affect port logistics and trading routes, while also increasing shipping times and costs. 

Even the perception of heightened risk in the Middle East is enough to drive oil price volatility and disrupt tanker schedules. Rising oil prices may encourage producers to boost exports, tightening supply chains and driving up vessel charter rates. 

Would Iran close the Strait of Hormuz?
In response to Western pressure in the past, Iran has threatened to close the Strait of Hormuz – a critical chokepoint for global oil shipments. Any disruption to traffic through the strait would likely restrict trade and impact global oil prices. As of now, key oil infrastructure remains unaffected, easing fears about the ongoing conflict. 

Experts believe a port closure is unlikely, as it would significantly harm Iran’s own economy, which is heavily dependent on discounted oil exports to China. These exports account for the majority of Iran’s foreign exchange earnings, making oil exports essential to its economic stability. 

Analysts suggest that if the port were to close, Saudi Arabia and other OPEC members could struggle to offset the reduced supply from Iran by utilizing their spare production capacity. In this scenario, oil prices would likely surge to market highs. 

Longer routes and tighter supply – as market adapts
If the conflict were to escalate further, the Red Sea and Suez Canal may be deemed too risky, which would push tankers to be rerouted around South Africa (COGH). This may result in longer sailing distances, and hence tighter tonnage availability, ultimately driving up freight rates. 

To replace oil shipments from the Persian Gulf, refiners would likely turn to West African and Brazilian crude. US and OPEC producers such as Saudi Arabia and the UAE could also ramp up exports through alternative routes such as the Red Sea pipeline and the UAE’s port of Fujairah, both of which bypass the Strait of Hormuz. In essence, any constraint on Hormuz forces global oil flows to adapt – shifting to longer routes and increasing volatility across both maritime and energy markets. 

In conclusion, positive market response amid global conflict 
While the conflict may prove to be short-lived, current market conditions have already improved as a result, driving increased earnings across most shipping segments. Should the situation persist over a longer period, it may benefit EMF’s investments through sustained higher earnings and rising vessel values across the board.