Hidden reason why South Africans are paying more for petrol and diesel

Little attention has been paid to the role of maritime insurance in driving surging oil prices worldwide, with more focus placed on disruptions to production and supply capacity. 

No production or supply from the Middle East can make its way into global markets and reach end users without insurers willing to underwrite the risks of moving oil. 

In this way, the “invisible force” of maritime insurance is exerting a significant influence on the trajectory of global oil prices, Old Mutual Investment Group portfolio manager Meryl Pick said. 

In a recent research note, Pick explained that, long before oil can flow freely again, insurers must have the confidence and willingness to underwrite all the risks associated with moving it. 

“Amid the frenzied speculation of when the Middle East conflict will end, and trade routes will be reopened, without this confidence, even a physically reopened shipping route remains, in effect, closed,” Pick said. 

The world of maritime insurance is not typically well understood or part of an investor’s toolkit until it becomes central to the global economy. 

Pick explained that at the centre of this dynamic lies the Strait of Hormuz, which is one of the world’s most critical energy supply chokepoints. 

Disruption to oil flow through the Strait has significant implications for global supply and prices, making it the main driver of South Africa’s recent petrol price increase, one of the country’s largest hikes since 2008.

Much hope, and investor trading, is based on the Strait reopening relatively soon, whether by US-Israeli forces putting boots on the ground or a negotiated deal. 

“Yet, markets may be oversimplifying what it means for the Strait to ‘reopen’. The resumption of safe, insurable passage is a far more complex process than a simple cessation of hostilities,” Pick said. 

Pick explained that maritime insurance in the region was either withdrawn completely or placed on extremely short notice at the beginning of the conflict, with premiums surging. 

Oil tankers require several layers of insurance, from covering the vessel itself, the oil it is carrying, and the crew that staffs it. 

This is all required to be in place before the ship can load, transit, or dock anywhere in the world. Without these layers of insurance, shipping activity comes to a standstill. 

As a result, before the oil supply from the region can return to normal and prices fall, insurers will have to be willing to underwrite the risks associated with travelling through the Strait. 

This makes maritime insurance, or the lack of it, a binding constraint on global oil supply, pushing prices higher even if the end of the conflict is near. 

Riskier than ever before

In the Strait of Hormuz, the hurdle for insurers to take on risk is relatively higher than even historical examples, such as the Russian invasion of Ukraine. 

This complicates matters further and may necessitate boots on the ground from the United States to provide a physical measure of security. 

Pick explained that in the aftermath of the full-scale Russian invasion of Ukraine, insurance markets took several months to normalise. 

Similarly, other disruptions to the maritime insurance market require extended stretches of calm before underwriters are prepared to return at scale and at commercially viable rates. 

“For the Strait of Hormuz, the hurdle may be even higher. Insurers are unlikely to rely solely on political assurances or temporary de-escalation,” Pick said. 

“Instead, they may require verifiable, on-the-ground measures, such as mine clearance, secure naval oversight, and credible guarantees of safe passage. These do not materialise overnight.” 

Pick said that because of this, there is likely to be a substantial lag between a resolution to the conflict and the restoration of oil flows from the Middle East. 

“Markets, influenced by recency bias, may expect a swift normalisation based on past conflicts that appeared contained or short-lived,” Pick said. 

“Yet, even in a best-case scenario, the rebuilding of insurance capacity and confidence could take weeks, if not longer.”

Some short-term relief is on the cards, with the United States having wartime provisions that enable it to provide insurance and reinsurance for American-flagged vessels. 

This could offset the withdrawal of private insurers to a small extent. However, Pick warned that their implementation is legally and operationally complex. 

Furthermore, such measures do not address the perceived risk of traversing the Strait without naval escorts. Thus, such a shift in perception is unlikely. 

Pick warned that this could see oil prices remain elevated for longer than expected, even if tensions appear to ease. The bottleneck is not only about physical supply. 

By the time oil prices normalise, Pick said prices throughout the economy are likely to have risen significantly, with a rippling effect throughout supply chains. 

“As the conflict evolves, the temptation will be to focus on visible milestones: ceasefires, negotiations, or military developments,” Pick said. 

“Yet the true signal may lie elsewhere – in the gradual, less visible return of underwriting capacity and the quiet re-entry of insurers willing to take on risk once more.”