Oil traders and refiners are increasingly turning to smaller crude tankers, as the Strait of Hormuz blockade makes large vessels too risky and expensive to deploy, shipping company executives have said.

Charterers are shifting from the very large crude carriers (VLCCs) to smaller Aframax and Suezmax ships. These vessels offer lower insurance premiums, reduced risk and superior maneuverability amid highly volatile 'on-off conditions affecting the vital energy chokepoint in West Asia, they said.

"The chartering market is pivoting sharply toward smaller tonnage. Very Large Crude Carriers (VLCCs) are essentially non-deployable right now because their size and value make them uninsurable for Gulf transits at any rational premium," Jitendra Srivastava, CEO, Triton Logistics & Maritime, told Moneycontrol.

"We are seeing a shift to Aframax and Suezmax class vessels, which offer better maneuverability and lower "value at risk" per voyage."

Aframax tankers are medium-sized (80,000-120.000 deadweight tonnage), typically used for short-to-medium hauls. Suezmax tankers (120,000-200,000 DWT) are larger, designed to pass through the Suez Canal fully loaded.

The shift follows as the war between the United States-Israel and Iran has led to war risk insurance premiums for commercial vessels surging up to 7.5 percent in recent weeks.

Data from Lloyd's of London, the world's leading insurance and reinsurance marketplace, shows war risk premiums rising from 0.25 percent to 3 percent, pushing insurance costs for $200-300 million tankers from $600,000 to up to $9 million a trip, fundamentally altering voyage economics and profitability.

"What we are witnessing is not a disruption in the conventional sense; it is a near-complete paralysis of one of the world's most critical trade arteries, Srivastava said.

According to a Bloomberg report, Japanese refiners are using smaller tankers to transport US crude to evade disruptions, opting for vessels that can pass through the Panama Canal rather than navigating longer routes.

Three mid-sized tankers are scheduled to deliver US oil to Japan from late April through May, with two already transiting the Panama Canal and moving into the Pacific Ocean, ship-tracking data compiled by Bloomberg shows.

Oil traders are making use of these small and mid-sized vessels to stock up on crude and the supply it to smaller markets for a premium, experts said.

"We are seeing this shift prominent in the spot market, wherein traders are moving away from VLCCS towards these smaller vessels to store more crude and supply to markets like Sri Lanka and Thailand for much more premium," said Capt Pappu Sastry, chief executive officer of Adhira Shipping and Logistics.

Aframax and Suezmax demand growth is expected to exceed that of VLCCs in the short term. VLCC strength may return in H2 2026 if OPEC increases flows, according to a note from Kpler in February.

Alongside this, "shadow fleet" activity has reached unprecedented levels, Srivastava said.

"We are seeing older tankers operating without standard Western insurance attempting dark transits or utilising ship-to-ship (STS) transfers in the Gulf of Oman to bypass the Strait," he added.

While this mitigates the insurance hurdle, it does not solve the throughput problem, he said. "You need significantly more voyages to move the same volume, which is creating a massive operational bottleneck for Indian refiners who require consistent, high-volume supply."

Indian refiners, who primarily source Russian crude, are using the Baltic Sea route or other shipping lanes and continue to rely on larger vessels.

Source: Moneycontrol 

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