De-escalation and the freight trade

If the current trajectory of Iran talks, ceasefires, and diplomatic engagement continues towards a deal / sustained strait transits, the freight market is likely to move through three distinct phases. Each carries a different risk profile, and the traders and charterers who benefit most will be those who understand the likely sequencing now. The first and most immediate effect will be a broad reduction in the risk premium embedded across Middle East routes, but that initial selloff is not the main trade. It’s the setup for larger longer-term positions.

Nowhere is this more true than in AG TD3c paper. If VLCCs return to regular Strait of Hormuz transit, the market will almost certainly overreact to the downside as risk premium evaporates. A confirmed deal and proven strait transit logistics would reprice M01 paper sharply lower.

What the market will be slower to price is the consequence of where the fleet actually is. Many VLCCs have spent the past month employed in the Atlantic basin, drawn there precisely because of the lack of AG opportunity. As those vessels slowly, cautiously, decide to reposition back to the AG, available spot tonnage in the AG will be systemically short relative to cargo demand and rates will need to reprice higher to attract them back.

The paper crash comes first, then the lack of vessel supply moves rates higher. Buying TD3c M01 and 2H26 paper into that weakness looks like the trade, with the principal timing risk being the pace of fleet repositioning and crude production restart.

The structural case beyond that repositioning phase is still strong for the VLCC market. A deal that brings Iran back to the international fleet, combined with Venezuela’s continued re-engagement with conventional shipping, would meaningfully increase tonne-mile demand.

Russia would remain the one major producer still reliant on the shadow fleet, but with international enforcement of sanctions becoming increasingly physical rather than declaratory, the effective supply of shadow tonnage is slowly contracting. More legitimate cargo demand and less shadow fleet employment points to a tighter VLCC market across 2H26.

The AG LR2 market and TC5 paper market will follow a similar script, with one additional variable. CPP vessels have repositioned en masse away from the Arabian Gulf, and de-escalation will trigger the same sequence; initial rate weakness, an out-of-position fleet, and a vessel supply squeeze that drives spot rates higher.

The TC5 paper and LR2 tanker trade mirrors the TD3c one in structure and the 2H26 strength case holds equally for LRs. The additional variable is the current Aframax market. A meaningful number of Aframaxes dirtied up over the past six weeks, drawn by stronger DPP rates and longer haul voyages, which has reduced the effective LR2 fleet size and will contribute to strength in clean rates once AG product exports return.

As dirty Aframax earnings soften, those vessels clean back up and re-enter the CPP market, eventually capping LR rates, but the window between initial clean-up and that normalization is likely to be several months. In that window, the spread between TD25 and TC5 paper could widen dramatically as the market prices renewed demand for LRs.

The USGC won’t be immune in this scenario. The Gulf has traded at a structural premium as it became the default source of supply for global crude and products, with ballasters increasingly looking there for employment and available vessel supply rising steadily. In the coming weeks, the US crude and product export programme is likely to tighten as domestic balances adjust to recent sustained export flows.

The result is more ships arriving and fewer cargoes to absorb them. The USGC voyage premium will erode, and spot TD25 and TC14 paper will weaken as the forward curve normalizes lower. This trade plays out over time, but the direction becomes clearer the closer the strait of Hormuz gets to sustained transit flows.