Trump's escort plan was decisively undermined by JPMorgan's calculations: if the Strait of Hormuz is closed for three more days, oil prices may spiral out of control!

Analysts say that as the Middle East conflict enters its seventh day, the Trump administration's plan to address the suspension of oil tankers in the strategically vital Strait of Hormuz is facing a key obstacle.

The war launched by the United States and Israel against Iran last Saturday has disrupted traffic in the strait, leaving thousands of oil tankers and container ships stranded, while shipping charter rates have surged to new highs. This has led to a spike in oil prices, causing turbulence in global financial markets on Thursday.

Earlier this week, U.S. President Trump vowed to provide U.S. naval escorts for vessels and stated that a relatively lesser-known U.S. government agency—the U.S. International Development Finance Corporation (DFC)—would offer political risk insurance for maritime trade.

Collective head-shaking on Wall Street: Goldman Sachs lacks confidence, JPMorgan predicts losses.

However, JPMorgan analysts noted that this directive faces a practical issue: the insurance cap of the agency is 'too small relative to the risks.' In other words, the amount currently authorized for expenditure by the agency is insufficient to cover Persian Gulf vessels damaged or destroyed while crossing the strait, leaving shipowners facing the prospect of significant losses.

Goldman Sachs said there is 'not much confidence' in whether U.S. measures to protect oil and gas tankers in the Strait of Hormuz can resolve the current situation. Samantha Dart, Co-Head of Global Commodities Research at Goldman Sachs, stated: 'The practicality of naval escorts is questionable given the large number of tankers.' She also expressed concerns about the effectiveness of frigates in defending against drone attacks.

A White House official said late Thursday that representatives from the agency and the U.S. Treasury Department have been negotiating with insurers and conducting an extensive analysis of the maritime situation in the Gulf region, which remains a top priority for the administration.

The official stated that JPMorgan’s research report was based on 'misconceptions about what kind of insurance the region actually needs and how DFC insurance might be structured.'

Other figures in the shipping industry, including a marine insurance company, have warned that the plan is largely impractical, at least in the short term. Even if a feasible plan is formulated, it may not be implemented in time to prevent a global energy shock, including rising gas prices at U.S. stations.

The DFC, which the Trump administration aims to rely on, is the international investment arm of the U.S. government. Some of the largest projects undertaken by the DFC (or those exceeding $150,000) include financing global vaccine procurement for impoverished nations and providing loans to small and medium-sized enterprises in developing countries.

JPMorgan analysts estimate that every vessel currently in the Persian Gulf requires coverage for pollution, salvage, hull, and third-party liability insurance in the event of a total loss. This implies a maximum insurance capacity need of approximately $352 billion, which the private market is currently unable to provide. They estimate there are 329 oil tankers in the Persian Gulf, along with hundreds of container ships and other types of vessels. This amount far exceeds the current investment cap of the DFC, which its board raised to $205 billion in February.

Gulf states could deplete their storage capacity within days under certain scenarios, forcing them to halt oil and gas production. JPMorgan’s updated forecast indicates that as of Wednesday, Iraq and Kuwait have buffers of only about two days and thirteen days, respectively, for crude exports via the Strait of Hormuz. Worse still, these figures represent conservative estimates.

The bank calculates that if the blockade of the Strait of Hormuz persists, supply losses will accelerate. By the eighth day of the blockade (three days from now), there will be an enforced reduction of approximately 3.3 million barrels per day, increasing to 3.8 million barrels per day by the fifteenth day and reaching 4.7 million barrels per day by the eighteenth day. This calculation pertains solely to crude oil.

Skuld, a Norwegian maritime insurer (one of the few such companies globally), stated that while government plans are 'encouraging,' the 'actual implementation process is far from smooth.'

“A comprehensive review of the process is necessary, including an analysis of insurance scope parameters, premium structures, criteria for determining reasonable prices, and definitions of geographical restrictions. These aspects undoubtedly require considerable time and careful examination,” the insurer noted.

Questions also remain regarding logistical issues related to U.S. Navy protection, such as which countries might be excluded and how any measures would interact with existing extensive international sanctions against Iran. “These ambiguities…will only intensify as the conflict evolves,” Skuld stated.

Time waits for no one: No one relies on a single tweet.

U.S. Treasury Secretary Bessent attempted to ease concerns about the Strait of Hormuz on Wednesday, mentioning that the administration would soon issue 'a series of announcements' to support shipping trade.

Analysts at Wolfe Research believe the U.S. government’s proposal for maritime insurance is 'legally feasible' – the DFC has broad authority in loans, loan guarantees, equity investments, insurance, and reinsurance. They indicated that conditions can be 'carefully managed.' However, whether this will have an impact on the ground remains another question.

“Will this reassure maritime industry participants enough to actually cross the Strait of Hormuz? We’re not very confident about that,” said Wolfe analysts. “At the very least, it will take some time to take effect because formal implementation is required – obviously, no one will rely on a single tweet.”

Wolfe Research stated that time is limited, and if shipping disruptions persist or Iran begins to cause greater damage to regional energy infrastructure, the government has few options for 'controlling the impact on energy prices.'

The official noted that, in addition to negotiating with insurance companies, the government is exploring 'other intervention measures' to ease tensions, including possible naval military escorts. 'More announcements will be made regarding this presidential priority, but the government believes the DFC has the necessary resources to fill the gaps,' the person said.

The U.S. government estimates that approximately 20 million barrels of crude oil and petroleum products pass through the strait each day during peacetime, accounting for about one-fifth of global crude oil and liquefied natural gas production.

Last Saturday’s attack on Iran triggered retaliation from the country and strikes on oil infrastructure targets in the Gulf region. This was followed by a sell-off and market volatility. Crude oil futures traded in New York have risen 18% so far this week, while Brent crude futures traded in London have increased by 16%.

On Thursday, Angola's state-owned oil company Sonangol reported an explosion on one of its vessels anchored near the Iraqi coast. Sonangol stated that the vessel is currently stable and operational.

The U.S. Navy has previously escorted ships in the Gulf region, most notably during the Iran-Iraq War in the 1980s, when President Ronald Reagan authorized Kuwaiti tankers to fly the American flag and receive naval escorts.

According to a paper published in 2020 by the Naval War College Review, the operation, codenamed 'Operation Earnest Will,' became 'the largest and most complex surface warfare operation conducted by the U.S. Navy since World War II, as well as a rare instance of the United States using force to protect access to crude oil.'

Editor/joryn