The Impact of the Strait of Hormuz Disruption on Global Shipping

As a result of the joint Israeli and US strikes on Iran in early March, the Iranian government has taken a retaliatory step and announced the de facto closure of the Strait of Hormuz, an extremely vital shipping route. With around 3,000 vessels passing through this important seaway each month, the disruption creates significant challenges for the global shipping industry, particularly regarding commercial shipping operations, maritime law and marine insurance risk allocation.

But before analysing these implications in detail, it is important to understand why this narrow stretch of water plays such a crucial and strategic role in global maritime trade.

Strait of Hormuz. Source: Lloyd’s List

The Strategic Importance of the Strait of Hormuz

Situated between Iran to the north and Oman to the south, the Strait of Hormuz connects the Persian Gulf with the Gulf of Oman and serves as one of the most important maritime chokepoints in the global shipping system. According to the International Energy Agency, an average of roughly 20 million barrels of crude oil per day transit the strait, accounting for around one-fifth of global petroleum consumption. These energy flows are vital for major importing economies, particularly in Asia, including China, India and Japan, as they rely heavily on crude oil imports from Gulf producers to meet their domestic energy demand.

In addition to the crude oil, a key component of global energy supply, Liquefied Natural Gas (LNG) is also transported via the Strait of Hormuz. Major LNG exporters in the region, particularly Qatar, largely depend on the strait to export more than 90% of their LNG shipments to international markets, with these exports forming a substantial share of Qatar’s overall export revenues.

But why is this strait crucial for Iran itself?

The answer is quite simple. Apart from being a lucrative seaway, the Strait of Hormuz has been used by Iran as a geopolitical lever for a long time. Iran’s geographic position enables it to disrupt or threaten to close the passage through military means, primarily used as a response to the political and economic pressures from western countries. This leads to higher oil prices globally, causing a chain reaction to all other costs of living.  Presently, once more, Iran has utilised this bargaining power to signal its willingness to disrupt maritime transit through the Strait of Hormuz in response to the recent escalation of tensions in the region.

Current State of Affairs

On February 28, the United States and Israel started a large-scale military offensive against Iran, targeting nuclear sites, military bases, and high-level Iranian officials. This led Iran to respond back by bombing several US military bases across the Middle East, targeting countries such as Kuwait, Qatar, United Arab Emirates and Saudi Arabia.

On the same day, immediately after the Israeli-US strikes on Iran, the Islamic Revolutionary Guard Corps (IRGC) sent VHF (Very High Frequency) radio warnings, alarming the vessels that the Strait of Hormuz is forbidden for passage ‘until further notice’.  The United Kingdom Maritime Trade Operations (UKMTO) also reported the heightened levels of risk in the region and cautioned the seafarers about the potential for rapid escalation. Additionally, UKMTO further clarified the legality of the closure, informing the vessels that the restriction of transit through the strait is not legally binding under international law, including the United Nations Convention on the Law of the Sea (UNCLOS) unless implemented and enforced in accordance with relevant international legal provisions.

Currently, the disruption in the strait continues. The number of ships transiting the strait has declined drastically since the start of regional tensions. Recent reports indicate that only one to two vessels per day are currently transiting the Strait of Hormuz, compared to the usual 80–140 ships that used to pass through the corridor daily. This notable decline in the number of vessels indicates the increasing uncertainty that is facing the global shipping industry.

The disruption carries significant risk from the broader commercial perspective, blocking major shipping companies from carrying out their operations and leading to a general increase in operational costs.

Commercial Implications

The Strait of Hormuz disruption has already shown its critical role in commercial shipping.

Since the start of the regional tensions, several major shipping companies such as MSC, Maersk, CMA CGM and Hapag-Lloyd have suspended transits through the Strait of Hormuz and instructed their vessels in the region to proceed to shelter or safe waters. These decisions proved to be sensible as the number of ships attacked has continued to rise, resulting in multiple seafarer casualties and leaving hundreds of vessels stranded or at anchor. According to the International Maritime Organisation (IMO), at least 7-10 civilian seafarers have been killed and several more injured across various incidents involving commercial vessels since late February, while a significant number of vessels have remained at anchor or delayed their voyages. These reports not only highlight a significant supply chain disruption but also surging freight rates and shipping costs.

According to the recent market updates, a barrel of Brent Crude oil has jumped roughly 20-50% from late February, currently standing at approximately $108.30 – $108.78 per barrel due to the disruption. These changes in crude oil prices have contributed to the increase in freight rates, particularly regarding tanker and container shipping. For major shipping routes such as Middle East Gulf to China, VLCC (Very Large Crude Carrier) rates are at the record high of $423,736–$424,000 per day, which is more than double the levels seen just before the tensions started. Additionally, the global average for container freight rates is also experiencing roughly 8% increase, mainly because of rerouting through the Cape of Good Hope which adds extra days and higher costs to the journey.

Therefore, global powers such as the United States are continuously urging countries that rely heavily on the Strait of Hormuz to prioritise the security of maritime transit routes, recognising that any prolonged disruption could have severe consequences for global shipping markets and energy supply chains.

Insurance and War-Risk Considerations

The escalation in the Strait of Hormuz has significantly affected marine insurance, particularly through the increase in war-risk premiums.

A war-risk premium is an extra insurance cost paid by the shipowners to protect their vessels from the potential dangers that may arise due to war, terrorism and in general hostile acts which are explicitly excluded in standard maritime insurance policies. As the Strait of Hormuz is located in a high-risk, hostile region, it becomes notably expensive for vessels to transit the Gulf as they are required to pay additional premiums, dramatically increasing the costs of maritime operations.

Through our conversations with Akshay Misra, a managing associate in the shipping team at Penningtons Manches Cooper, it becomes clear that insurance is a crucial aspect of determining whether vessels can operate in volatile environments. As he mentions, if underwriters begin declining cover or pricing risk prohibitively, commercial operations can become legally and economically unviable even where vessels remain technically seaworthy.

Prior to the current disruption, war-risk premiums ranged between 0.15% and 0.25% of hull value per transit. After the outbreak of tensions in the Middle East, major war-risk insurers, alongside Protection & Indemnity (P&I) Clubs issued cancellation notices and new war-risk quotes jumped to 1% - 3%. This meant that, for a typical $250 million VLCC tanker, an extra cost of sailing through the strait would range from $2.5 million to $7.5 million per single transit, rendering most commercial voyages economically unfeasible.

Insurance and war-risk premiums also overlap with legal complications, as rising costs and restricted coverage can trigger contractual rights and disputes between shipowners and charterers.

Legal Complications in Maritime Contracts

From a legal aspect, the disruptions in the strait have given rise to significant legal complications in maritime contracts, particularly regarding the risk allocation agreed between the ship owners and charterers.

According to Akshay Misra, many of these issues are currently being addressed at a preventative stage, with parties actively reassessing their contractual rights. Contractual mechanisms such as CONWARTIME and VOYWAR, play a key role in this context, allowing shipowners to refuse to enter areas where there is a potential of war and hostility towards the vessels. These clauses give shipowners the ability to refuse to enter dangerous areas, avoid conflict zones by taking alternative routes, or delay voyages where necessary.

However, the main issue arises in determining whether the level of risk is sufficient to justify the exercise of such rights. In particular, distinguishing between general regional instability and a real likelihood of exposure to war risks can be highly controversial. While shipowners may seek to prioritise the safety of their vessels and crew, charterers may argue that the risk is not substantial enough to justify non-performance of the contract. This creates the potential for disputes between parties, particularly in relation to delays, additional costs, and liability for non-performance.

Similar tensions in the past have proven that, at times like this, maritime law becomes less theoretical and more about the immediate commercial realities of shipping operations.

Final Thoughts

The ongoing tensions between the United States, Israel and Iran have severe consequences not only for the global shipping industry but also for human lives. Although the commercial implications of the disruption of the Strait of Hormuz are reflected in rising freight rates, increased insurance costs and supply chain instability, the human aspect of this crisis remains equally significant. Seafarers operating in the region are exposed to heightened risks, often navigating through areas affected by ongoing missile attacks and escalating hostilities.

These developments highlight the urgent need for stability in the region, not only to ensure the continuity of global shipping and trade, but more importantly to safeguard the lives of those who operate at the heart of the maritime industry.