The shipping industry is confronting a harsh reality: the Strait of Hormuz, long considered too critical to remain closed for long, has now been effectively shut for six days with no clear path to reopening.

The Assumption That Failed

For years, shipowners on industry panels and quarterly calls have been asked the same question: What happens if the Strait of Hormuz closes? The answer was almost always identical - if it ever happens, the closure will be brief, because the world cannot afford for it to be long.

This response, repeated so often it became conventional wisdom, now looks like a failure of imagination. As the Middle East war enters its second week, an extended closure of the strait seems not just possible, but increasingly likely.

The Safety Reality

The practical barriers to reopening are mounting. War risk insurance costs for passage through Hormuz are already high, mirroring conditions during the Red Sea crisis. More immediately, the risk to seafarers and vessel assets is extreme, with Iranian attacks on commercial shipping continuing.

On Thursday, the International Transport Workers' Federation designated the Strait of Hormuz, Gulf of Oman, and Middle East Gulf as Warlike Operations Areas. Under these conditions, seafarers "instructed to enter [the WOA] have the right to refuse to sail and request repatriation at the company's expense."

This creates a fundamental commercial problem: even if shipowners wanted to send vessels through, their crews may refuse. And even if crews agreed, charterers would need to pay the high freight rates that such dangerous voyages would command.

Red Sea Lessons Applied

The Red Sea crisis offers a recent parallel. Despite US military attacks on Houthi rebels in March-May 2025, commercial traffic did not return to normal levels. As Joshua Tallis, adviser to the chief of naval operations at the Center for Naval Analyses, noted at a recent conference: "The US Navy doesn't really have the domain expertise on the pressures from maritime insurance rates and war risk insurance."

Three weeks before the current Middle East war broke out, Tallis observed that while the Navy understands the strategic importance of Hormuz as an oil chokepoint, it lacks detailed plans for protecting commercial shipping in such scenarios.

The Storage Time Bomb

The situation differs critically from the Red Sea crisis in one key aspect: the Red Sea is an "open" chokepoint where ships can go around using the Cape of Good Hope. Hormuz is a "closed" chokepoint.

This distinction creates a ticking clock. The crude, products, liquefied natural gas, and liquefied petroleum gas inside the strait is effectively shut in. While some Saudi Arabian crude can be moved via pipeline to the Red Sea, Middle East Gulf oil producers are rapidly running out of storage.

When storage fills, producers will have to shut down operations, which takes time to restart. Qatar has already fully shut down its LNG operations, representing around 20% of global supply. The country's energy minister warned that all exporters in the Gulf region will have to declare force majeure within days if the closure continues.

Market Rates Reach Historic Highs

The crude tanker market, already experiencing its strongest boom since the mid-2000s, has seen rates surge to unprecedented levels. The Baltic Exchange's MEG-China VLCC index reached a new high of $485,959 per day, while the MEG-Singapore VLCC index hit $507,709 per day.

These numbers are theoretical for voyages that would load inside the Strait of Hormuz, as the Baltic Exchange notes that panellists are "using their professional judgement" where no direct fixtures are available.

Some VLCCs are still loading outside the strait - at the Red Sea terminus of Saudi Arabia's East-West Pipeline - allowing for comparable rate estimates. One VLCC was fully fixed at $537,913 per day for delivery to India, while another was on sub-charter at $757,772 per day.

The Atlantic Basin Opportunity

In the near term, shipowners can avoid the risk altogether and still make enormous profits by sticking to safe loading ports in the Atlantic basin, where rates are benefiting indirectly from the war. This dynamic is already pushing ballast tonnage away from the MEG market, where ships would be stuck in queues outside the strait.

However, this creates a longer-term challenge. As tonnage redeploys to the Atlantic basin and other safe alternatives over weeks, it would heighten competition for non-MEG cargoes. This could eventually put downward pressure on rates, to the extent that production elsewhere cannot be increased to compensate for MEG losses.

The Medium-Term Bearish Case

BW LPG's chief executive warned that while US volumes flowing to markets east of Suez are supportive for freight in the short term, "over the longer term, vessels that have traditionally loaded in the Middle East are likely to seek cargoes from the US, which could place downward pressure on the rate structure for US loading VLGCs."

The same negative medium-term dynamic would apply to other commodity shipping trades. Spot rates will remain very strong in the near term due to the urgency to book cargo, the tonnage stuck in the MEG, and longer tonne-miles as Asia sources more energy from the Atlantic basin.

But if the Hormuz closure drags on long enough, more tonnage will be in position to bid for replacement cargoes, and non-MEG volumes could not increase enough to offset what was shut in.

As Pareto warned in a client note on Thursday: "We stress that a prolonged closure of the Hormuz will be extremely bearish."

The shipping industry's long-held assumption about the brief nature of any Hormuz closure has been shattered. What happens next depends not on market forces alone, but on complex geopolitical calculations and the willingness of seafarers to risk their lives in one of the world's most dangerous waterways.