Insurers Abandon Gulf Energy Lifeline as Strait of Hormuz Nears Total Shutdown

Marine insurers have withdrawn war risk coverage for vessels transiting the Strait of Hormuz, effectively closing the waterway that carries 20% of global oil and nearly 20% of liquefied natural gas, after Iranian attacks on tankers and Gulf energy facilities left two dead and triggered the steepest freight cost spike on record.

The crisis erupted February 28 following joint U.S.-Israeli strikes on Iran, including the assassination of Supreme Leader Ali Khamenei, prompting the Islamic Revolutionary Guard Corps to issue warnings prohibiting vessel passage through the strait and leading to an effective halt in shipping traffic. War risk premiums have risen as high as 1% of a ship’s value in 48 hours, up from 0.2% last week—adding hundreds of thousands of dollars in costs per shipment, with a $100 million tanker now facing $1 million in Insurance costs for a single voyage. Major insurers announced cancellations after the IRGC declared the strait “closed,” forcing shipping companies to seek new coverage at dramatically higher cost—if available at all.

The benchmark freight rate for Very Large Crude Carriers shipping 2 million barrels from the Middle East to China hit an all-time high of $423,736 per day Monday, marking a 94% increase from Friday’s close. According to CNBC, most shipowners were avoiding transits after insurers cancelled war risk coverage for vessels in the region. Major container lines including Maersk, Hapag-Lloyd, and CMA CGM suspended all transits, with more than half of leading Protection & Indemnity providers suspending war-risk cover for Gulf calls.

Energy Infrastructure Under Direct Attack

The conflict has escalated beyond maritime harassment to direct strikes on Gulf production facilities. Iranian drones struck Qatar’s Ras Laffan liquefied Natural Gas complex on March 2, forcing QatarEnergy to halt production and declare force majeure on shipments. QatarEnergy, the world’s largest LNG producer, suspended production of LNG and other products at impacted sites, with no casualties reported. Benchmark Dutch and British wholesale gas prices soared almost 50% following the announcement, while Asian LNG prices jumped 39%.

Saudi Arabia’s Ras Tanura refinery—one of the world’s largest oil refining complexes—halted operations after debris from intercepted Iranian drones caused a small fire, with Saudi Aramco controlling 12% of global oil production and capacity exceeding 12 million barrels per day. In the UAE, multiple Iranian drones struck fuel tanks at the port of Duqm, causing an explosion, while a drone strike was recorded at the Port of Salalah. Iraq, with limited storage capacity, has been compelled to begin massive production cuts, and JPMorgan warns that Saudi Arabia and the UAE may need to follow suit within weeks.

Insurance Market Collapse Amplifies Crisis

The withdrawal of coverage represents a market-driven enforcement mechanism that has proven more decisive than military threats. According to International Finance, tanker traffic depends not just on whether ships can technically pass through Hormuz, but on whether operators can obtain war-risk coverage—once coverage becomes prohibitively expensive, trade slows faster than the formal status of the waterway changes, with insurance becoming the market’s enforcement mechanism for geopolitical fear.

David Smith, head of marine brokers McGill and Partners, noted that each underwriter is invariably increasing rates or declining to offer terms for vessels passing through the strait. Protection and indemnity insurance was removed for March 5, making the economic risk too high for shipowners, and while the strait remained technically open, it became effectively closed. President Trump announced that the U.S. Development Finance Corporation would provide political risk insurance “at a very reasonable price,” with naval escorts if necessary, according to Al Jazeera.

Cascading Economic Consequences

Oil prices rose sharply, with Brent crude increasing 10-13% in initial trading, and analysts forecasting potential rises to $100 per barrel or higher if disruptions persist. European natural gas prices increased from €30/MWh the previous week to €46/MWh on Monday March 2, peaking above €60/MWh on Tuesday—nearly double the previous week—before decreasing to €48/MWh on Wednesday. According to Bloomberg, oil producers across the Middle East face a tense countdown as the Iran war blocks the region’s main export artery, filling storage tanks and threatening output cuts if the situation persists.

Most crude shipped through Hormuz flows to China, India, Japan and South Korea, and under the assumption of a six-week closure and oil prices jumping from $70 to $85 per barrel, regional inflation in Asia could rise by about 0.7 percentage points. Estimates indicate that almost half of India’s monthly oil imports pass through the strait, while the country sources a significant portion of its crude and LNG via routes through Hormuz. India, with only nine to 10 days of strategic stocks, is more exposed to prolonged disruption, while Europe faces high gas prices and sustained loss of supply.

Higher oil and gas prices would raise transport and manufacturing costs, with freight rates and insurance premiums jumping as shipping companies avoid high-risk waters, while import-dependent economies in Europe and Asia would face rising energy bills, weaker industrial output, and stronger inflationary pressure. According to CNBC, the European Central Bank faces a “genuine dilemma,” as an oil shock could push already sticky inflation higher while its growth outlook weakens under the strain of higher U.S. tariffs.

Alternative Routes Insufficient

Bypass capacity remains woefully inadequate. The Strait of Hormuz handles approximately 20-21 million barrels per day through a shipping corridor of just 2 miles in each direction, with alternative pipeline capacity through the Saudi Arabia-UAE system providing only 4.8-5.0 million barrels per day—covering approximately 25% of typical Hormuz throughput, and combined alternatives extending to 6.5-7.5 million barrels daily, representing only 35% of normal volumes.

Major container shipping companies suspended transits and related routes like the Red Sea after Houthi-controlled Yemen announced they would resume attacks on commercial ships, forcing Suez Canal traffic to be rerouted around Africa’s Cape of Good Hope, which added weeks to transit times and increased costs. Container shipping rates from Asia to Europe increased 20-30% within days of the March 2026 incident, as operators priced longer routing and higher fuel costs into contracts.

What to Watch

Storage capacity timelines will determine whether Gulf producers can maintain output or must implement widespread cuts. Before the conflict, market data showed an oversupply of roughly 1.5 million barrels per day for 2026, a buffer that could evaporate quickly if refining or upstream capacity is taken offline by prolonged Iranian attacks. BlackRock analysts see a 10- to 14-day buffer for how energy markets could handle disruptions before triggering a stagflationary supply shock.

Central bank responses will shape inflation trajectories. Sustained oil price hikes may lead Asian central banks in the Philippines and Indonesia to pause rate cuts, while policymakers in India and South Korea will likely hold rates steady. Watch for coordinated International Energy Agency strategic reserve releases and whether Trump’s government insurance scheme attracts commercial participation. The critical question: can diplomatic pressure reopen the strait before Gulf storage tanks reach capacity and force production shutdowns that would remove millions of barrels per day from global supply—potentially pushing Brent crude above $100 and triggering the most severe energy crisis since the 1970s Arab oil embargo.