Announcement of Operation Prosperity Guardian, a joint military operation to protect commercial shipping in the Red Sea, was met with skepticism — and jokes about the Seychelles, a popular island honeymoon destination off the coast of Africa.

The existing naval security operation in the Red Sea, Combined Task Force 153, is a 39-nation partnership. Operation Prosperity Guardian has just 10 partners: the U.S., U.K., Canada, France, Italy, Spain, the Netherlands, Norway, Bahrain and the Seychelles.

As of Wednesday, there were no details available on what Operation Prosperity Guardian will do beyond expanded patrols, or how long it will take for escorted convoys to be put in place, if at all.

Container ships may have stopped sailing the Red Sea, but not tankers and bulkers.

“Officials have played down the idea that they will provide naval escorts for commercial vessels,” said ship brokerage Braemar on Tuesday.

According to Evercore ISI shipping analyst Jon Chappell, “The number of ships that transit the Red Sea is large enough that the U.S. is reportedly guiding against the idea that 100% convoy escort is viable.”

If military escorts for all ships aren’t possible, and if the Houthi rebels in Yemen continue to attack vessels that transit the Bab-el-Mandeb Strait, coalition forces could launch retaliatory strikes on Houthi positions in Yemen.

However, that could lead to escalating military action in the region, making ship operators even less likely to use the route.

Binary outcome

Current fallout from the Red Sea crisis is focused much more on container shipping than other vessel segments.

Virtually all container vessels are rerouting around the Cape of Good Hope. Container ships that had already transited southbound through the Suez but had yet to reach the Bab-el-Mandeb Strait are now turning back, paying another toll to get to the Mediterranean.

Numerous bulk commodity ships are heading to the Cape, as well, but not to the extent container ships are. That could change with a military escalation, which could increase reroutings across all shipping sectors.

“We see the outcomes as fairly binary here,” said Chappell in a research note on Tuesday. “Either the creation of the task force substantially restores confidence in shippers using the Red Sea/Suez route, or further escalation largely closes the route.

“The former is the dominant base case, but it is worth being attentive to the latter risk case, as the consequences could be macro-significant,” Chappell warned.

He sees the “strong base case” as “we revert to something tolerably close to business as usual.” But he believes the risk of escalation is “non-trivial.”

In a worst-case scenario, in which Red Sea transits for all ship types are heavily curtailed, “we could see freight prices go up multiples — think five to 10 times,” said Chappell.

“These costs would be passed through to the consumers and shippers and supply chain bottlenecks would re-emerge as the greater distances around Africa would tie up extreme amounts of shipping capacity.”

In the unlikely event of a full closure of the Red Sea/Suez route for more than a week, Chappell said it “would start to have global effects.”

Diversions require more container-ship capacity

Automatic Identification System (AIS) ship-position data from Kpler-owned MarineTraffic shows how different vessel segments are dealing with the Houthi threat differently.

Larger container lines have rerouted all of their services to the Cape of Good Hope. Ship-position data on Wednesday morning showed no container ships transiting the Bab el-Mandeb Strait.

Longer voyages will ultimately require more container ships to maintain the same service levels. According to Sea-Intelligence, the switch to the around-Africa route will require 1.45 million to 1.7 million twenty-foot units of additional ship capacity.

That, in turn, will help container lines absorb newbuilding capacity that is now being delivered, which should keep container freight rates higher than they would have been minus the Houthi attacks.

Bulkers and tankers continue to transit

In contrast to container shipping, AIS data shows that the Bab-el-Mandeb Strait remained heavily trafficked by dry bulk carriers on Wednesday.

MarineTraffic ship-position data on tankers — including crude and product tankers as well gas carriers — also showed ongoing traffic through the strait.

“Few tankers have thus far been rerouted via South Africa,” reported Braemar. “One or two fixtures via the Suez have failed in recent days, and we know of at least two Suezmaxes [tankers with capacity of 1 million barrels] that have been asked to delay passage through the Suez Canal until the situation settles down.

“We are still fixing cargoes via the Canal without Cape options,” confirmed Braemar. “Most owners we talk to are assessing [transits] on a case-by-case basis, even some of those that have publicly stated that they would not transit the Suez.”

Routing of laden tankers is determined by the ship charterer. Oil companies BP and Equinor have announced that they won’t route their cargoes through the Red Sea, but they are in the minority.

Lars Barstad, CEO of tanker owner Frontline (NYSE: FRO), told S&P Global Commodity Insights: “Shipowners have limited opportunity to reroute when the vessel is already under contract, if safety is deemed acceptable. Disappointingly few oil majors have adopted BP’s and Equinor’s policy.”

Another reason crude tanker flows are not seeing a big effect yet: Much of it is Russian crude, and the Houthis are backed by Russian ally Iran.

According to Ioannis Papadimitrou, senior freight analyst at Vortexa, “Of the approximately 1,200 laden crude voyages that transited the Red Sea in 2023, 60% originated in Russia. Given that Russian barrels are increasingly being carried by non-EU/Western operators, these flows face minimal risk amid the ongoing Houthi attacks.

“Additionally, these barrels are heading to non-EU/Western buyers, which further decreases the likelihood of disruption for these flows.”

Rates up for tankers transiting Red Sea

On the plus side for tanker markets, rates are rising for vessels that do take the Red Sea route.

According to Braemar, “While the attacks have failed to influence the broader tanker market, for vessels looking to transit the Suez Canal, the conversation — and the cost — has changed dramatically over the past few days. Suezmax charterers looking to fix Med-to-Far East via the Suez are looking at a jump of $850,000.”

Brokerage Fearnleys said Wednesday that Suezmax rates from the Middle East Gulf to Europe transiting the Red Sea “have firmed significantly … which is no surprise given developments there.”

Effect on shipping stocks

The container-centric effect of the Red Sea crisis is being reflected in near-term stock pricing.

Shares of container lines — particularly Israeli carrier Zim (NYSE: ZIM) — are rising faster than shares of owners of Suezmax crude tankers and product tankers.

Between Dec. 12 and mid-day Wednesday, shares of Zim were up 42%, albeit off highly depressed levels.

In contrast, shares of product-tanker owners Scorpio Tankers (NYSE: STNG), Torm (NASDAQ: TRMD) and Ardmore Shipping (NYSE: ASC) were up 16%, 15% and 11%, respectively, over the same period.

Shares of Suezmax owners Nordic American Tankers (NYSE: NAT) and Teekay Tankers (NYSE: TNK) were up 15% and 12%, respectively, since Dec. 12. Stock prices of mixed-fleet owners Frontline and International Seaways (NYSE: INSW) were up 11% and 10%, respectively.