Why Oil Tankers Still Are Not Returning to the Strait of Hormuz

Speaker A: Welcome back to another episode of the Oil Ground up podcast. I'm your host, Rory Johnston. A reminder to hit subscribe and leave us a review. And if you have any questions of us or any feedback on the show, please drop us a line at Oil Groundup or@, ah, clearcommodity.net Oil GroundUp is distributed in partnership with the Clear commodity network@clearcommodity.net and also the Oil and Gas Global Network, the leading podcast network for oil and gas. Our guest today is Salvatore Mercagliano, a maritime historian at Campbell University and the host of what's Going on with Shipping? Sal is one of my absolute favorite sources of information pertaining to the ever complex shipping industry. And the context he provides about the recent history, current status and forward outlook of the Hormuz crisis is invaluable for anyone trying to figure out when this chaos will finally end. Sal Mercagliano, welcome to the Oil Ground up podcast. Thanks so much for joining us.

Speaker B: Oh, thanks for having me, Rory. I'm excited about this.

Speaker A: Um, so I think, you know, you are the shipping guy. You know, shipping, you've tracked shipping. You, I mean, over the last hundred or so days, it's been an encyclopedic breakdown of what's going.

Speaker B: Sure.

Speaker A: You had no idea, kind of that like, you know, shipping has been so exciting for the past half decade now it seems unending, but before this, you're tracking ships trying to escape blockade in Venezuela and now all of a sudden, like the mother of all. And it's the mother of all oil market shocks. It's the mother of all oil shipping or kind of tanker and shipping and shocks. Um, so I think first, just before we get into kind of what's currently happening, just give us your kind of like five minute breakdown of what's happened through your perspective over the past a hundred days in the straight and kind of what you have been watching.

Speaker B: Sure. More accurately, I just ship talk all the time, Rory. That's what I do. That's all I do. I mean, this is an unparalleled event that's really happened. You would have to go back to the 1960s with the shutdown of the Suez Canal to find something akin to, to what has caused this trauma across it. Uh, we had always known there was always the fear that the Strait of Hormuz could be interdicted or potentially closed, but that was really kind of an outside idea because during the tanker war of the 1980s, we never saw the strait close. But then again, what we saw in the 1980s was gradual escalation over the course of 10 years. What we didn't see was the idea of a kind of a shock and awe attack by the US And Israel and Iran responding with attacks, and then the reaction of shipping to this. And we should have known this, Roy. Um, I mean, the thing that gets me more than anything else is we saw this happen in real time two years prior in the Red Sea with the Houthi. We had the kind of that test take place. And what we saw was shipping was risk adverse, which is a shock to many in the military. They don't understand the concept of risk when it comes to commercial shipping. They understand risk in military, but they don't understand it in commercial. And what we saw was shipping companies take that long route around Africa, and that's been the norm. They haven't even come back. Before this conflict started, we hadn't seen literally the large return back. And so that when, you know, when March 1st happened, and I think March 1st is the date we want because that's the day that the Iranians started attacking ships. That caused everybody to lock in the place. They, they locked in the place. And I think the element that caught me off guard more than anything else was not that the US Was unprepared for it, but that the US had not moved enough assets into the area to think that they're going to need to provide security for this, because that was the other element. You know, the war risk got everybody's attention for that first week, but war risk was handled within a week. I mean, that was done. I mean, commercial insurance was out there. The commercial market responded like we expect it to do. But what they were waiting for is, okay, where's our security? Where's the US Navy? Where is the protection we're going to get to run through this strait? And that didn't materialize because I really think that at the upper level of the US Government, we're talking about the civilian, not the military. They thought this was going to be two weeks. They thought this was going to be like July of 2025, two weeks of strikes. We get a response from Iran, and then the strait stays open. And instead what they got was the ship mess that we got in the Strait of Hormuz with everybody locking in place. And now what we see is competing Straits of Hormuz, the northern versus the southern, and we get mines, which again, was another, uh, surprise that no one quite expected to see the Iranians unleash.

Speaker A: Yeah. So I think let's, so let's fast Forward. Now actually one thing to dwell on this because I would actually agree. One thing that surprised me cuz again everyone focused on this war insurance or insurance provision or whatever. But the kind of economist in me was looking at the, you know, the differences in prices, effectively negative crude prices on the wrong side uh, of the Gulf or alongside the strait in the Gulf and skyrocketing prices on the other side. Like the economics were there to justify $5 million, you know, a VLCC for sure. Like we're talking like this is like a couple dollars a barrel in a market that was dislocated by upwards of 100 plus dollars a barrel. So just on that, can you just dwell a second longer on what was actually driving the decisions of ship owners, charterers or whomever was making these decisions to not risk it? Was it, was it, was it like legitimate fear on the part of, you know, the captain and crews about like, you know, you know, losing life and limb? Was it uh, ship owners worried about losing the capacity of that ship in a future market? Was it insurance? And it just wasn't with the numbers we were seeing. Just no one was able to get that anyways, like what actually was preventing the trans. Because I wrote in like the first week, we never saw, we never saw a, a, a uh, lockdown and we never saw true closure through the tanker wars where many, many, many more ships were sunk, um, than we saw through this crisis. And that surprised me the degree to how quickly it was just a sudden stop. So like talk to me a bit about why that happened because I think that'll help us appreciate what, what will get them to come back in on the other side potentially.

Speaker B: Well, I think it had a lot to do, number one, with mixed messaging. The messaging coming out from the United States, unsurprisingly, was not clear. I mean there was a lot of, of of of you know, kind of convoluted statements about what this war was, what's going on. And I think in uh, many ways the United States does not understand commercial shipping. They just don't. In past conflicts they've had the advantage of having the British with them who kind of understand it a little bit better in this case. They're kind of going alone here and didn't quite understand what was going to happen when all of a sudden they unleashed this. I think the other element they had there, which is a really important one, is I don't think shipping, I think shipping would have taken advantage of it. We saw early on some Greek ship owners do this. They took Advantage of this ran their ships through because they had these ridiculous charter rates for VLCC that were out there. It was like insane amount of money and they were all for it. But I do think that on the backside, one of the big issues they had was that, and you mentioned it just a minute ago, is the future loss. I mean, they were fine to potentially lose a ship and lose a crew. I hate to say that, but that's just the pure economics of it. The problem to get into is do I want to lose that ship and crew and then not have that ship for 15 years? Especially in a marketplace where it's getting a little bit more difficult to get ships out there. Right now, if you're placing an order for a vlcc, you're three years out to get that. Because of the way the shipbuilding is right now, it's very difficult. We're also dealing with issues of the IMO and the, uh, pollution issues. So again, buying a ship right now is a really tough thing to do. And I think for ship owners right then they would rather just sit out, wait for a moment and see if this resolves peacefully, and then go ahead and sail. And it's one of the reasons why you didn't see the BLCC heading as fast as you did over to the United States. They're sitting there in the Arabian Sea waiting for it to open up because that's their quicker route to go. And I think everybody found that the situation that was most kind of similar to me was when ever given got stuck in the Suez and everyone was piling up on both sides of the canal, sitting there going, do we go around? Or we wait? Do we go around? Do we wait? If they pop ever given out within a set number of days, it's better to wait, but if they can't get it out, it's better to go around. And I think everybody was doing their economics on this. What is the better situation on the cost of return? And I really do think that the US Failed, for example, when they started talking about war risk insurance, they were talking about that week five or six. I mean, you had to be talking about that on day one. They were just behind, uh, the power curve in how to talk to the shipping companies. They really needed to have a couple of shipping companies in line ready to run the straight on March 2nd, 3rd, 4th. If they had done that, if they had shown they were able to get ships through, minimize damage, I think they could have kept the strait maybe open a little bit more. But they didn't do that. Instead, everything locked and it became inertia to get it going again.

Speaker A: Yeah. And I think, to your point, that, like, when. When they said, you know, what was it on. On. On the second Monday of the war when Trump said, we're. We're done here pretty much and everything's gonna wrap up, you know, if there's assumption that, you know, every one of these moments where Trump jawboned the market, kept low oil prices lower, kept all of. All the same thing was happening across all industries. You know, if you were. If you were thinking about making the rest, you're like, well, it's gonna be open next week, so why. Why risk it? So all of these inter. These verbal interventions, these jawboning episodes, really prevented all markets from adjusting to the new reality, because why go through the very painful and potentially risky adjustment period if you're just. If things are just going to normalize on the other side? So, like, not only did they prevent prices from responding higher, but they also. They also prevented the flow through the straight to actually naturally correct more quickly as well. Is this kind of what you're saying?

Speaker B: Yeah. And again, that mixed message is, in one hand, you have the US Sinking an Iranian frigate off the coast of Sri Lanka. The second hand, you have Iranian ships running the strait and sailing past American ships. Because, listen, we, uh, unsanctioned Iranian oil there for a while at the beginning. And it's like, hey, we got to keep Iranian oil flowing to keep the market going. And it was just the strangest, strangest conflict at the very beginning, because the only ones who were using the strait were the Iranians for a while. And that seemed to be fine because, again, one of the problems that the US had is they had enough military forces in place to execute offensive missions. They did not have enough in place to execute a, uh, blockade and defensive missions in place. They couldn't go into that if they had blockaded right at the beginning, if they had, you know, locked down Iranian oil and ships right from the very beginning. I think you get a different mixed message here. But again, I don't think the US had in mind that this is going to be, you know, we're 100 days in now, and still it's not clear where we're at in this conflict.

Speaker A: Yeah, so in terms of where we're at in the conflict, I kind of see this. And, you know, very, very roughly, in terms of the shipping traffic, in terms of the transit through the strait, kind of broken into kind of maybe four or five episodes so far. Obviously, in the beginning through like early mid March. There was the initial. Just shock. No, everything was frozen. Nothing was moving. Except, as you note, Iranian barrels kind uh, of still keeping at 1 and a half, 2 million barrels a day, depending on how you were counting. Then we had this period where this was the new normal for a while. People were starting to get more used to it. There was discussion about the Iranian tolls, all this other thing. And then we saw this rise in late March, early April of ships going through the Iranian side of the route. Then you had the ceasefire signed or the ceasefire declared. Um, and then very quickly we actually had a rollover of that. You had the imposition of the U.S. blockade, uh, not long after. Uh, then you had kind of another period of weakness where you weren't seeing a lot of Iranian ships going through at all. You weren't seeing a lot of other ships allowed through either. Then we had this period, kind of late May, early June. This was like following Project Freedom, uh, and the kind of US attempts to force or facilitate more flow through the Strait. That didn't seem to work very well initially. But then over time it did seem like we did see a rise in shipments, uh, dark transits, largely, uh, Emirati, uh, but also kind of then dovetailing into these kind of unidentifiable origin shipship transfers in the Gulf of Oman that were kind of facilitating a, ah, fairly notable rise in the total flow back from say, 2 million barrels a day to maybe 5 million barrels a day during that period. Can you talk through before we. And this is just before we get to the current MOU reality. So before we get to that, like, talk to me through what you were seeing at that period. Uh, what types of trends, how wide the. The Gulf and estimate the Gulf, how wide the. The spread in estimates. Uh, you were seeing work because obviously there were huge, you know, deviations between visible tankers and different methodologies for counting dark transits and these chips are transfers. Etc. So talking about how, where we stood immediately prior to the mou, so when

Speaker B: the US initiated that Project Freedom, and they were very careful in how they initiated this because they were dealing with issues of the ceasefire. They had a, uh, issue in the US Congress with several votes actually on whether or not to enact the War Powers Act. So the Trump administration was trying to really differentiate what was going on. And that's one of the reasons why this is project, not an operation. So they ran out two American ships in a very kind of, uh, broadcasted movement and then backed away. But they didn't Back away. And that was the thing that was happening behind the scenes is they kind of announced they were, but they didn't. And instead they put all the pieces in place. Those first two ships, Alliance Fairfax and CS Anthem that came out were really the test bed for them to start doing it. And then what they were doing is working with a lot of the state owned tanker companies, adnoc, uh, KOTC and a few others in the region to kind of broker and start bringing ships out and kind of run them through the strait and start shuttling. This is where we started seeing those ship to ship transfers out in the Gulf of Oman, kind of running a parallel dark fleet. The US had its own version of a dark fleet. It was running dark on AIs, dark running through the Omani Channel. And, you know, then we started getting indications that this was happening. Intertanko sent out their message and then Secretary Wright talked about it in open testimony. Uh, then President Trump at the White House just blabbed about it and talked about it.

Speaker A: 100 million barrels, right, right.

Speaker B: That was the 100 million barrels that were coming out. Which again, sounds great. And you know as well as I do, but that's five days worth of oil. It's like, okay, you're starting to move, but you're not moving a lot. But again, what it did is it was kind of demonstrating to the Iranians that, listen, we can move, we can start doing this. And I actually thought it was a bad move on the part of the US not to tout that more. I thought that was being a very successful operation. They were getting by kind of on the cheap with it too. They were doing air cover. They really weren't doing US Navy ships in. And I think they could have really increased that quite a bit. Central, uh, command was working very well at doing that operation. But at the same time too, you also had the US respond to the Iranian blockade. And this is where we saw the strikes on the Iranian tankers. A couple of tankers were hit off the port of Jask. And then more importantly, three, uh, open, uh, registry ships were hit off the coast of Oman. And one of them resulted in the death of three Indian crew members on board. I think that caused a bit of a backlash against the United States. The US realized they had to be careful about how they were striking. And so I think that got you to the point with the MOU that they were really trying to get out of having to do these strikes. India in particular was a big player in this. I think India and Pakistan behind the scenes were playing a massive role. India was getting a lot of oil and liquefied petroleum gas out. They had to, they needed it. You had Iranian ships running through the territorial waters of Iran, Pakistan and India. Uh, there was a massive anchorage of Iranian ships sitting off of India waiting to go in. And so I think there was a lot of issues at play here that really pushed the US into this mou, and not the least of which is Iran was trying to force the United States to get Israel to back off. I think Israel is the other player here and that's one of the reasons why Lebanon is so prominent in the MoU.

Speaker A: Yeah, so let's, so let's turn to the MoU now. So before, before we get into the actual physical flow, change what stood out to you in the document itself? Now, various versions of it were bouncing around. It was kind of, it was playing catch up, whack a mole to try and figure out which version you were talking about. But it generally seems like it was a paragraph 4 and 5 of the uh, MOU were the things that primarily dealt with the removal of the blockade. Uh, the mention of pre war levels, which again we'll, we'll get to in a second. Uh, and then the discussion about basically how Iran was going to re. Loosen its control over the strait and enable some kind of return to normal shipping, but under the control of Iranian authorities to some degree. Um, while also kind of saying like, we won't charge you tolls for the, for the first 60 days only. But talk to me about those two provisions and kind of what you picked up on, what words got dropped over various. I'm sure you were like me trying to like track like all the changes that were happening in real time. So what stood out to you with that document?

Speaker B: So I thought first that week, first of all, it was a crazy week, uh, because you had, I mean you literally had President Trump telling ships, start your engines and head for the straight when. And, and then you had the U.S. central Command come out and say, hey, blockade still in effect. We're, we're, we're blockading until Friday. And, and then you had Iranian ships start running the blockade, meaning that, okay, this is gonna take place. I thought the, obviously the execution was a big problem. What got me most is the quid pro quo. What was the standard? There seemed to be the concept that, okay, we released a blockade, Iran opens the strait. That seemed to have been the intent of what was going back and forth. However, the Iranians kept in the MoU that provision that, listen, they're not ceding. They're not, uh, ceding control. They have not backed away from that idea of the Persian Gulf Strait Authority, even though it's a sanctioned entity and it was created with oversight over the entire strait, the Iranians weren't backing away from it. And it was very clear in the mou that was it. And this goes back to my idea that the US doesn't quite understand shipping. I just don't think they do. And it's like, I don't think they understood what they were ceding over to the Iranians in this control. Uh, and it doesn't stand. I mean, you had Arsenio Dominguez from the imo, the president of the imo, coming out like, this is not gonna stand. Can't put tolls in place. This is very different, but behind the scenes. And this is the thing that I don't know enough about is how Iran is negotiating with the Gulf states to try, because UAE and Qatar have gotta get the strait open. They have to. They got to get it moving. Kuwait has to have it open. And so, you know, were they pushing the United States like, hey, just let Iran have this. They'll keep the northern half of the strait. I think the US Assumed that the southern strait that they had set up this operation was going to be free to keep operating with no problem. Meanwhile, they're going to sweep the center of the strait, the traffic separation scheme. And once that's clear and open, that will restore us back to that issue. But the problem is the US has so decapitated the Iranian government that the pgsa, the Persian Gulf Strait Authority, is under the irgc, it's under the Islamic Revolutionary Guard Corps. And they responded very quickly to this. I mean, this is where they came out saying, listen, the strait's closed. And then they came out with their rules and provisions about this, including the insurance.

Speaker A: Yeah. So let's just dwell on that. So the pgasa, the Persian Gulf Strait Authority. What is it? Let's start there.

Speaker B: So the Persian Gulf Strait Authority is an interesting. I mean, I will say it's one of the most interesting things that came out of this was the idea that the Iranians came up with. The ideas like, hey, we'll go legal. And it really shouldn't be a surprise, to tell you the truth, because one of the things we've seen over the past is Iran, when they seized ships back in 2019, 2021, 2022, actually do it did it through legal processes. They actually had the ships condemned, arrested under Iranian law. So Iran Decided, hey, we'll play your game. We're going to set up this authority over the strait. And they're kind of modeling it under the Turks, under the Danes. We're gonna set this up. The difference is that the Iranians don't control the strait. I mean, territorial waters are not theirs. But then again, they don't recognize unclause the UN Convention of the law of the sea. So they decided to set up this authority. And the authority is to control passage in and out of the strait. And they got into paperwork and they got into forms and they set up a webpage and they have an email address. And now you've gotta fill out the paperwork to go ahead and do this. And you have to be either approved or disapproved. And then they had the provision in there for war risk insurance. Hey, you've got to get Iranian war risk insurance. Which to me made me laugh in my last video because I sat there and said, you have to. Iran wants you to defend, you know, get insurance against everything that Iran does to you. That's basically what they did. It's like they want you to get flood insurance and they control the dam that releases the water onto your house. That's what they were doing. They're basically forcing m you to do this. But again, it gives them this element of control that is very unique. I would argue that Iran doesn't need a nuclear weapon anymore. They have a weapon. It's called the Persian Gulf Strait Authority. And they can unleash it at any moment because while the US has sunk the Iranian navy and put it on the bottom, and you could hear Secretary Hegseth talk about this all the time. Commercial ships aren't afraid of Navy ships. They're afraid of little speedboats. They're afraid of. They're afraid of anything. They just don't want to get shot at. And all you need is the threat of that to deter them. And that's what the PGSA is setting up. It's trying to set up. Now, the scary thing about the pgsa, I will say this is if they get backing of the Gulf states, this turns into something different. If it's just Iran, it doesn't have a lot of legs to stand, legally speaking, there's really no precedent for it. If, however, the Persian Gulf states all come into this, because I thought that was interesting name, it's the Persian Gulf State Authority. You know, they're looking at the Gulf entirely. It's not just the strait, uh, and they're not just looking at Iran. Itself, I would argue if they can bring in the other pieces into it, that gives them a unique form of control. And their argument is, even with their toll and fees, it's going to be less money than war risk insurance. And more importantly, if they can establish, you know, a free movement of ships through, that would be a revenue generator for them outside the hands of the

Speaker A: US we'll be back after this short break. Hi, this is Chris Berry, host of

Speaker B: the Power Current Podcast. Throughout my investing life, I've been obsessed with a single question. What happens when commodities, geopolitics and technology collide? About 15 years ago, I founded an advisory firm to help answer this question for both companies and investors alike. And the Power Current podcast is an extension of this effort. Each episode we dive deep into the current state of the most important markets, companies and technologies that will power the revolution in energy today and into the future. Find the Power Current podcast wherever you get your podcasts.

Speaker A: And now back to our conversation with Sal Marcogliano. As, uh, I've mentioned before on this podcast that like, even at $2 million, like the Abraham, let's say it was $2 million, you, uh, know, fee, you, you can't build a pipeline, uh, for less than a dollar per flowing barrel. Like, even under, even in this world, a toll is still vastly cheaper than any of the physical rerouting options that you would have available. Now, that doesn't change the fact that we will still see all of those reroutings because it's not just a question of economics, it's a question of geopolitics. It's a question of power and control and politics. But I think, yeah, there's a world in which, you know, these, the, the toll, the cost of the toll is so much less than the cost of just the disruption through the strait. Generally, that at least is an interim thing. You're like, uh, ah, well, maybe this is like the best of a worst situation that we can have right now. Um, when we look though, in terms of. We have seen. So now let's, now let's go into. We, we have the MoU. It got signed apparently multiple times over the course of last week. Um, but it's been signed now. It's enacted. Uh, we have seen a rise in transits through the Straight over the past couple days. I've got, you know, everyone has their own preferred count. Um, I, I'm a, I use a lot of Kepler data. So I think we've got, you know, at the peak on Saturday, I think there were, uh, 34 you know, tracked vessels. This is both between um, in and out. This is between visible AIs and kind uh, of their methodology for tracking dark transits. Um, but that was kind of the peak and we've seen it remain higher than pre MOU period, but down from that peak over the last couple of days. Um, in terms of oil supply, it's actually meant a lot because a lot of the trends, a lot of those ships, it's not just the same composition. A lot more vlc, we've seen a lot more physical oil. I mean my Tracker is at 8.5 million barrels a day over the trailing 10 day average and hitting like 14 million barrels a day over the weekend. So like there was a lot of oil going through. This is a, this is different than what we've seen before, but we're not seeing a uh, continued normalization. We have not yet seen a rise to pre war exits, let alone reentry. So talk to me about what you're seeing. And the other thing is on the composition. We've seen fewer dark transits and more visible transits through the Iranian toll booth or whatever we want to call the northern route. We're also seeing fewer of these shipship transfers in the Gulf of Oman. Like is how much of this is an actual m, you know, absolute change in what's happening versus just a change in how it's being tracked and classified?

Speaker B: Oh, I, I think it's a substantial change. I mean I agree with you that this is the most we've seen going through since February 28th, without a doubt. The problem is it comes with that sort of Damocles over it, that it can end at any moment and it's not in any way a return back to levels. As I push back against with Secretary Wright and, and, and, and a lot of the other administrative administration officials who are sitting there saying, hey, we're back, this is great. Levels, we're good. This, this is, this is really hanging by a thread in some cases because it's only going to take one incident to kind of throw everything off right now. The other element you have too is obviously of course we're focused on oil, which is a key one to focus on. But where are we doing in other commodities? Obviously I look at fertilizer a lot. That's one, that's really a big one to come out. Are we seeing that? It was interesting story about aluminum, how aluminum is really being kind of filled in by other commodities and stocks that went in and we know we stockpiled a lot of oil before this all started, which was a really key element. But I think again, and you know as well as I do, anytime you put risk into the equation, that increases costs. And this is going to be a very expensive movement of oil through the strait by this process. This is the problem. War risk is being sought after by these companies. They're paying. This is adding to the eventual cost. And while oil's coming out, the question I have is the return back in. Are we seeing the empties coming back in? Because while oil's coming out, there was a lot of ships piled up in there that wanted to get out. Are they getting back in there and are we seeing that return back up to the levels that we had? We're not seeing with LNG right now. Obviously Qatar had the explosion, so we're waiting to see what that assessment looks like with them. Uh, Kuwait just started getting themselves flowing. Iraq has been getting some out through their agreement. And the question becomes, do we get ourselves back to a pre war level? I don't think so right now. I, I would tell you that, and I've said this a lot, that if even if you had, you know, Bibi Netanyahu, President Trump and the Ayatollah hug and kiss and make up, and I apologize for that image. But if they, if they did that, would shipping go back to pre war levels? I don't know. I mean, we don't have the evidence of that in the Red Sea as of right now. And if it does go back, what level more expensive is going to be to do operations in there? Which I think one of the things as you know, is what we're seeing is a redrawing of those new supply chains out there. I mean, the Russians are pushing LNG through the Arctic route sooner than ever before and they're pushing more ships that way. Right now we're seeing that realignment of the supply chains. And so this is a good indication. The question I have is how long does this maintain and at what cost is this going to be per barrel coming out of there? That's the number I want to see.

Speaker A: Yeah. So you, you perfectly predicted the direction of this next question. Because my question is about these re entries. Yes. That basically we've seen again, using my eight and a half million barrel a day kind of trailing ten day average, I think it's pretty indicative of the kind type of sustained flow that we're seeing rise to the strait. But the loadings I'm seeing in the Gulf are only three to four to maybe five at the upper End like we're seeing half or less of the, of the loadings relative to the pace of exits which means we're drawing down the stock of floating uh, storage or kind of stranded vessels that have been in there over 100 days. There was always going to be a faster exit of desperate stranded tankers than a re entry. But it's only the reentry that's going to allow the kind of and facilitate the restart of this 13/4 million barrel a day of, of uh, crude production and liquid production in the Gulf that has been shut in through the crisis. We need those ships back in to start this restart process. So then let's talk about restarts. So I think there's a couple questions here off the bat. One, going back to that first question we talked about of like why ships weren't risking it through this crisis when they had previously and we, and I think you, you gave a really good answer there. So now the question is like what do they need to see in order to feel safe to go back? Because obviously you know, it's a very different thing to say get your ship out of harm's way with a little bit of risk versus taking a risk to put your ship back directly in harm's way because you need to enter and then re exit on the other side and there's a chance you get stuck. Particularly given that uh, we're now in this Even more tenuous 60 day negotiation period on the stickier nuclear issues and at any moment, like you said, the sort of Damocles could come down and kind of chop the straight back in half again. Um, so talk to me a little bit about first just the kind of psychology or the kind of decision making of people thinking about getting their ships back in. Then I'm going to hit down a couple of these like fun talking points on, on things that could inhibit or, or throw sand in the gears of that process.

Speaker B: Well, I mean, I think you're exactly right. I mean we're seeing those ships sailing out, blowing the barnacles off of them and heading out and heading out to sea. Uh, and you know that loading is absolutely crucial. And I think what again we come back to that root cause here, which you know, talking to the ships, talking to the crews and talking to companies when this first started is like okay, we can get war risk, we can pay for that. As you exactly said, we can pay for that. We'll pay. Whatever it is, whether it's 1%, 5%, 10%, we'll do it. We started an attack of War, they were paying up to 10% at some points. They will do that. What they want is security. Is the US for example, going to sail back into the Gulf? Are they going to bring US ships and us, not just US ship destroyers, but US commercial ships? Does that, is that an indication? Because if Iran has this prohibited class in the PGSA agreement, which they do, they say you could be prohibited from transiting. What does that mean? Because they don't say exactly what that means. Does that mean, okay, you're going to get a penalty or a fine? What? Or does it mean you're gonna get a missile or a mine or a drone? What does this mean? Because again, if I'm sailing on a liquefied natural gas carrier, I really, uh, like to know I'm not gonna get shot at. I really don't wanna be on a big ball of flame heading through the Strait of Hormuz. And I think the US has gotta shift into that area now where they show, okay, the strait is free for transit, you can move through and they have it. And this is the big issue. I think while the US has their part of the strait and Iran has their part of the strait, the problem is it's still not enough to justify sailing back into the strait. There has gotta be security demonstrated. And this was the problem you had with the Houthi during the entire time. Even though the US executed two military operations against the Houthi and kind of beat their chest and like, hey, we defeated 99% of all the drones and missiles that were shot at us. If there's still a 1% chance commercial firms are gonna balk at that, they're going to sit there and say, I need something, I need something better. Especially if I can go get oil at other places. If I can go to Nigeria, I can go to, I go to Venezuela, I can go other places, I can do it now. It's much more difficult to do that. And you know that it's the longer distances. It creates a lot of problems to do that. Yambu can only pump so much oil out. You've got to get back into the Gulf. It's just going to cost more money. But is it going to be state operated tankers which can underwrite their war risk insurance that's going to do that? Are we going to create a, you know, a ship to ship transfer point where you're going to bring large VLC season, minimize the number of ships going through so that you can go out? This gets very expensive and I think that's the Next iteration, we're going to see what becomes the new norm for business going through that southern passage. Right now you're seeing the exodus. Everybody's heading to the doors. It's the last day of school, they're all heading out. What's the next element that happens? What's the new school year going to look like in the Persian Gulf? And I don't know what it's going to be. Sorry, I'm a college professor. I keep thinking about this stuff in the back of my head.

Speaker A: Yeah. So let's talk very briefly on that before going into any of these other elements, just like physical capacity. Uh, obviously the reason they went through the official separation zone, uh, area in the first, what I call my charts the IMO route. Um, you know what, you know, if we're just going north and south, if, if there, if currently still no or very, very few ships are making the journey across the middle. Um, what is the physical capacity, let's say, ballpark, we were what, 130, 140 daily transits pre war. Is there physical capacity to hit that? If, let's say, let's say everyone wanted, everyone wanted to go, but they still couldn't go through the middle, Is there physical capacity to facilitate that level of flow through the northern and southern channels?

Speaker B: Um, oh, I think, I think you can. I mean, I mean, you had two mile lanes and, you know, having sailed through the Persian Gulf a few times in the strait, uh, you know, it's not like you're bumper to bumper. It's not the i5 on, you know, rush hour. It's by no means. Uh, you've got to get some navigation features in place. Obviously one of the bigger problems you have is if you're sailing that southern route, the GPS spoofing is a big problem because you really need to know where you're at. And if you don't have the GPS on, you got to be radiating on your radar. That kind of gives away your position. So you've got to have some security. I mean, the nice thing about the center route is you are far enough away from land. I mean, the straight of Hormuz is deep. It's fairly deep. There's a couple of crops, outcroppings you have to worry about, but if they're properly marked, you should be able to avoid them so you can move. Uh, I mean, one of the unique things was how Iran came up with their channel through Kisham and Laric. And it was a really innovative way. I was like, holy cow. I hadn't really ever thought about that, but it worked really well for them. Obviously, the center route is the preferred route, but as long as the minds are there, that's going to create the bigger problem. And it's always difficult to clear minds. I talked about this the other day. I mean, every year NATO has an exercise in the Baltic, and not unusual every year they find a mine, like, left over from World War II or World War I. I mean, you just can't get rid of these things once you dump them in the ocean.

Speaker A: Actually, that. My next question would be on mine. So it was at last Friday, last Thursday, I think, was last Friday. We had the first official kind of, you know, visibility, uh, kind of the first identification of a mine. And it was there have been. There had been suspected, uh, sightings before, but to my knowledge, this is by. By Pakistan. This is the first confirmed. So first correct me wrong, was that the first confirmed mine sighting?

Speaker B: Oh, my. Oman had it.

Speaker A: They.

Speaker B: They. They basically showed a visible mine. They basically showed you a mine.

Speaker A: Okay, so. And this is right off the coast of Oman. It's like sitting like, right in that Omani kind of southern channel. So the first question I got was, that's the area that, you know, you had Project Freedom flowing through a bunch of ships, like many, many, many ships over. Over the period of that month. So one, you know, how. How was that shipping occurring with that mine? My answer generally, and please correct me, I'm wrong, because you know way more about this than I do, but it was either, you know, luck that again, you noted that the water is big and, and, you know, mine is small in the scheme of, uh, the. Of. Of even the. The narrower straight and the narrower moni path. So even with all the ships, could have been lucky. Second option, it might not be fixed. It might be floating, and it might be like, you know, channeling and traveling around the Gulf, which is a whole different can of worms. And the third option is that someone planted it more recently. So talk to me about, like, what you're seeing with that mine as an indication, because again, they had always been rumored. It was kind of like, I, I think I tweeted the time the kind of like, they do exist. Eminem's Christmas thing. Like, oh, my God, we actually saw one. Um, and I think there have all been this. Rumors. It's always been this fear. But, like, does the visible sighting of one change things? And what about the loc about location? Does it tell us?

Speaker B: Yeah, I mean, it was always the great question about mines. I mean, you had The Irani deputy foreign minister was the first one who sat there and said, we mined it. And it's like, okay, there it is. You know, and we kept waiting for the official notice about it. I, you know, I sailed, uh, back in the 90s in the Persian Gulf when the Iraqis mined everything. And the problem with mines is, is you just don't know. I mean, they're just the variable. And it takes exactly zero mines to create a minefield. You just have to say there's a mine, and then you've got to assume there's a mine. It's like no one's going to sa into a minefield and not take the time and precaution to do it. But like you said, it is a very tough thing to locate and find. And you basically have to mow the grass. You have to mow the grass repeatedly to find them, and then you have to neutralize them. And the problem with mines is they break, they drift, they get loose. Uh, you know, even if the Iranians tell you where they laid the mines, they don't know where they laid the mines. They could, you know, unless you had the accurate gps, which we're spoofing all the time out there, nobody knows where they're at. So they create this kind of variable out there. We saw it in the Black Sea when there was debates about Russians and Ukrainians, uh, laying mines, and we saw mines start washing up in Romania and Turkey. You know, whose mine is it? We don't know because they use the same mine. Uh, so, you know, once you get the mine out there, you know, that's the indication what the US had been doing. And this is the other element that we had is even before Project Freedom, they were sending in these unmanned drones. I mean, repeatedly. This is the presence that you never saw, both surface and underwater drones. And that was key, is they were working to clear a channel when those US Destroyers went in the very first time. There is zero chance, I'm telling you, zero chance, that they went in sniffing for mines. They had a channel clear. They knew that they had mowed the grass enough that they had enough length, uh, width of a channel to get into the Persian Gulf and back out again. They hadn't swept that. And that's what you do. And, you know, when everyone talks about it's going to take two to six months to clear the mines, that's true. But that doesn't mean the straits close for two to six months. They will get themselves a clear path and just expand it, expand it, expand it. But it will take time and monitoring to ensure that these mines are clear. It's going to create a problem. And the problem you have too is the Iranians can drop these again tomorrow. That's the threat. Because they can drop them not just by boat, but by missile, by helicopter. Uh, there are multiple ways to drop these mines and they can do it. And, uh, the fact that they dropped one, I think it was about 1.6 kilometers from the shipping channel that the US identified in the Omani side is significant because that showed it was, I was on, it was on the Persian Gulf side, very close to that channel. That indicated to you they can get close. And having sailed through that area, there are fishing boats everywhere. You don't know who has a mine on board. Anybody can drop a mine off their back and this creates the problem.

Speaker A: All right, I've got two more questions because I don't want to keep you too long. I know you have lots of other appearances to, to get to. So the first question is in terms of some of the idiosyncrasies that could delay the return of these ships, in particular, whether it's the ships that are leaving. Uh, obviously many of those are the ships that have typically done the, you know, Persian Gulf to, you know, Asia route. You know, by definition they're the ones in there. Um, so we hear about barnacles, we hear about crew issues. I mean, Obviously we've had 12,000 seafarers have been trapped in the Gulf. Presumably they are not going to want to immediately get home and then turn back and go back to the Gulf. Like how, how much friction is there going to be from again? I mean, I know that barnacles are normal, but there's all this stuff about like, if they've, if they've fouled the prop or they fouled the rudders or whatever else, that at least some portion may need to be dry docked potentially before returning. Do we know the scale of these types of impediments, the degree, the coarseness of sand and the gears, if you will? Um, and like, how is, how are these identifiable or at least headline grabbing factors? How much do they actually, are they actually going to affect timelines?

Speaker B: I spent eight months on a ship in the Persian Gulf. We were in there the entire time basically. And you know, we weren't befouled with barnacles. We had growth on the ship, but just moving the ship, keeping it moving, kept it going, and you can do preventive. I don't think that's big. I think the crew issue, you're hitting on Rory is a big one. I think that is the one that's not getting talked about enough, because I was already hearing from it when the ships were in the Persian Gulf before we saw the reopening, any sort of reopening, that once the UAE started reflights back and you could start doing crew changes. Because the uae, I would argue, was the country that was the best for shipping. In there, they did the most for shipping. They actually was providing protection. They were actually getting stores out to the ships. It's a really unheralded story what the UAE was doing. I think they are the country that was doing it. But the problem that shipping crews had was getting replacements out there. Listen, they had all the crew want to get off, everyone to get the hell off. Nobody wanted to go back out because it was really. And this is a problem that's on top of what we had suffered a couple of years ago with COVID when mariners couldn't get rotated out back during COVID And now you have this situation with mariners coming under fire. Listen, if you're going to pay them and you're going to give them enough money, Mariners will do it. But the problem is, are they going to pay them? And the problem is they're not. And this, you know, double pay for a Mariner that's making $700 a month. You know, that may be a lot where they're living, but what you're seeing is shipping companies are starting to go to very strange places to start finding mariners. You know, the traditional ones are, you know, uh, Philippines, China, India, Indonesia, Russia and Ukraine. Now we're seeing them coming out of Africa, South America, where they're trying to find new mariners because they're having a hard time getting them on the ships. The problem is ships are getting a little more complicated, especially on the engineering side. It's an issue. And I think if you are going to be running ships back into the Persian Gulf, that's going to be an issue, because those mariners are going to start to balking. We're seeing like the International Transport Federation and some of the unions and advocacy groups that representing mariners going to bat with the ship registries. Hey, don't send them back in unless you agree, you know, you have 100% compliance with the crew, or else you got to get that crew member off. And oh, by the way, you can't blackball them either for it. So I think the crew is a really big issue that no one's really digesting yet.

Speaker A: Awesome. So I think that the final Question I have is putting this all together, the sum of these ships and their return impulse, how long is it going to take? You know, in terms of the, the ships scattered to the four winds, you know, they've been doing other stuff for a while. We have seen signs that you know, in the lead up to this, in the last week or so more and more ships, the LCCs, LNG carriers, etc. Were signaling a return to the region, uh, which I think is an early optimistic sign that some are returning but obviously not enough or all. So how should we think about the, you know, the timeline of getting from where we are right now where everything is kind of exit dominant to an actual sustainable kind of two way flow back through the strait again? And, and, and what kind of markers, road sign should we be looking for between here and there?

Speaker B: I, I think you look at this and you know the knee jerk reaction I have and I said this at the very beginning of this, you know, for uh, you know, every you know, day or two of disruption, you have about a week of reset to get back into it. Now this is, this is huge. We're talking about 100 days, we're talking about you know, you know, a year or so to get back number one. I don't know if we get back to full pre war, you know, everything. I just don't, I just don't know. I think we've, we've fundamentally changed how we move some commodities and where we're sourcing them from. You know, I think Yambu is going to be a big port for a long time. I don't think the Saudis are going to really want to bank everything coming into Rastan and, or the way they do. They would love to, they want to uh, they definitely want to see that return. Other countries don't have choices. Kuwait doesn't have a choice. Southern Iraq doesn't really have a choice. I think again one of the things that we start seeing is the dependency and really when we focus ourselves on uh, one node of failure as the Strait of Hormuz is you have to design alternatives around it and that's what's going to be being done. How do we uh, design the alternatives around it? We saw that with container shipping going into uh, Jeddah, uh, and into uh, uh, the uh, west coast ports in Saudi Arabia to ship overland. I think we're months, I mean we're in the next year before we get into a resolution because again if you open it up today and you flock all the ships in it's going to create consternation at the deep arc ports and the offload ports, and it's going to cause realignments of shipping. Hey, does that mean all of a sudden the US goes from exporting 4 to 6 million barrels a day back down to 3 million? What does that do to the US economy? Uh, we're seeing the backlog at the Panama Canal now and the issues that are happening there. LNG realignment out inside the marketplaces. I think what we've seen, and again, we have the case studies of this from ever given in the Suez, from the Red Sea, from even the Black Sea. It takes much longer to reset this than the actual event takes place. So we're 100 plus days in. It's going to take us a heck of a lot more than 100 days to get us reset back in. But again, I think no matter what you do, if you get an agreement, you still have the main players still in place. President Trump is going to be here till 2029. Bibi Netanyahu has kind of locked his place back in, in Israel right now. And we don't know what this Iranian government's going to do. And at any moment we can rip that MOU up because it really is nothing more than a piece of paper it's worth on. And since it's been electronically signed, how legal is it? Uh, and, uh, we're back to fighting. And I think that's the worst part about this, is we don't have a clean resolution. And it's going to create doubt in not just ocean shipping, but the commodities trades.

Speaker A: Well, thank you so much for joining us today, Sal. Before we let you go, give, uh, a shout out to where our listeners can find you and where they can hear more of your encyclopedic knowledge of the shipping industry.

Speaker B: I don't know about encyclopedic. I appreciate that, Rory, but you can follow me over at YouTube at what's going on with shipping? Uh, I'm on almost all the social media platforms, typically at Mercogliano. S. Mercogliano, Sal. Uh, so I'm, I'm on there all the time and I follow you religiously, Rory. So thank you so much for having me on. It's been great to get to know

Speaker A: you during this crisis.

Speaker B: I hate to this, but it's, uh, it's great to follow you and get a chance to see your, uh, posts, which are, uh, absolutely great.

Speaker A: Thank you so much. Yes, the Hormuz crisis is all the friends we made along the way. Right. Thank you so much for joining us, Sal, and, uh, have a great day.

Speaker B: Thank you for having.