Global Commodities: From chokepoints to checkbooks

**Natasha Kaneva** (0:03)
Hello, and welcome to another episode of At Any Rate. I'm your host, Natasha Kaneva, and I'm JP. Morgan Global Commodities Research. This week delivered headlines across the board, and commodities were no exception. Rent crude has pulled back about 11 percent from the last week's highs, but on the supply side, the underlying picture has worsened. Namely, flows through the Strait of Hormuz have reverted to May levels, averaging roughly about 3.1 million barrels per day over the past seven days. Tightness is also emerging west of the Arabian Peninsula in the Red Sea, where the hoodies continue to restrict Saudi tanker traffic. The blockade hasn't shut shipments entirely, but it has effectively halved Saudi transit through the Bab al-Mandeb Chalk Point to around 1.5 million barrels per day, pushing at least one million barrel per day to reroute via the Suez Canal. As we noted in March, this alternative is expensive and operationally difficult. A round trip from Saudi Arabia to Asia can stretch the trip by roughly 40 days. Very large crude carriers, so-called VOCCs, typically must transit the canal only partially loaded because the Suez Canal is shallow, unless crude is offloaded into the Egypt-Sumet pipeline and lifted again on the Mediterranean side. In other words, the Red Sea barrels do have a workaround, but it comes with added logistics and higher costs, potentially shrinking the room for discounts to Asian buyers.
That constraint control has also prompted the Hooties to float the idea of imposing their own fee in the Bab al-Mandeb this week, though they have later denied it. While their leverage is nowhere near Iran's in the Strait of Hormuz, the discussion has reopened broader question around the legality of transit fees, and more importantly, the long-run viability of relying on natural shipping choke points.
This discussion is especially important as in our view, the control over the Strait of Hormuz is the main point of contention between Iran and the United States. The core dispute is whether the Strait is an international waterway guaranteeing unrestricted transit, or whether Iran as a coastal state has the sovereign right to regulate control and potentially charge commercial vessels for passage through the Strait. Iran's position is that as a sovereign coastal state, it has the legal right to regulate navigation, including imposing conditions for passage and charging. What is interesting is that the precedents suggest that the strategy could be legally defensible as we pointed out in early May.
Working jointly, for example, with Oman, which shares jurisdiction over the Strait, Iran could argue that vessels transiting the Strait should pay not for the right to pass but for specific services rendered. For example, that could be navigational safety, vessel traffic management, security escorts, emergency response, and environmental protection. By structuring the measure as a service fee rather than a transit toll, and by coordinating with Oman as the other littoral state, Iran could propose a legal framework that appears consistent with international maritime law. The objective in this case would be to secure at least tacit support from the United Nations and the International Maritime Organization by emphasizing that the charges are non-discriminatory, linked to identifiable services, and intended to enhance the safety and environmental integrity of one of the world's most strategically important waterways. What makes, in our view, the strategy particularly intriguing is that it is neither legally novel nor without the precedent. So, for example, the key reference point is the United Nations Convention of the Law of the Sea, UNCLOs, which is the principal body of international law that governs how ships navigate the world's seas and oceans. It was adopted in 1982 It went into force in 1994 There are about 193 member states in the United Nations, 170 of them ratified the treaty, including Russia, for example, China, in the European Union. In the case of the United States, it has neither signed nor ratified UNCLOs, having never secured the two-thirds Senate majority required for ratification. But United States generally accepts most of its navigational provisions as a customer international law. In the case of Iran, the country has signed UNCLOs, but has not ratified it. So the UNCLOs draws a very bright line between artificial canals and natural waterways in that operators of artificial canals, for example, Egypt in the case of Suez Canal, Panama in the case of Panama Canal, are entitled to levy transit tolls because they're sovereign man-made infrastructures. Natural international straits, for example, however, are governed very differently. As a general rule, coastal states may not charge ships tolls merely for exercising their right of passage. What is interesting, however, is that Article 26 of the UNCLS explicitly permits coastal states to charge non-discriminatory fees for specific services rendered to ships. Importantly, the concept is also reflected in practice. Several states already operate versions of the service fee model for charging, for navigation, and safety-related services rather than for the passage itself. So let's start with Turkey, for example. Turkey has abroad regulatory powers in the Turkish Straits. That's the Bosphorus and the Danube, and the country can charge services under the Montreux Convention regarding the regimes of the Straits. So for example, today, Turkey charges a Suez Max, that's about one million barrels. Oil tanker, approximately $130,000 for a round trip passage, which equates to just 13 cents per barrel. Denmark and Sweden likewise provide and charge for specific services in the Danish Straits, including pilotage, tag assistance, ice breaking, vessel traffic services, and port and anchorage services.