Soaring freight rates price US crude out of reach for Asian refiners, Reuters reports
- Tanker freight rates soaring to record highs are putting United States crude oil out of reach for Asian refiners, pushing them to seek alternative supplies from the Middle...
- Simpson, Spence & Young shipbroker data on LSEG showed that hiring a very large crude carrier (VLCC) to haul 2 million barrels of US oil out of the...
- At $40 a barrel, shipping costs have jumped significantly from $8.60 before the US-Israeli war on Iran began in February.
Tanker freight rates soaring to record highs are putting United States crude oil out of reach for Asian refiners, pushing them to seek alternative supplies from the Middle East and Latin America, according to multiple traders and shipbrokers who track those markets, Reuters reported.
Record Freight Costs Close Arbitrage Window
Simpson, Spence & Young shipbroker data on LSEG showed that hiring a very large crude carrier (VLCC) to haul 2 million barrels of US oil out of the Gulf of Mexico toward China for November reached an $80 million price tag. That expense means the economics of moving the oil on that route are no longer viable, closing the arbitrage window for the trade, traders and shipbrokers told Reuters.
At $40 a barrel, shipping costs have jumped significantly from $8.60 before the US-Israeli war on Iran began in February. Those costs are now equal to nearly half of the current price of a West Texas Intermediate crude future contract, raising expenses for refiners in the top oil importing region while shipowners reap bumper profits, Reuters noted.
Asian Refiners Pivot to Murban and Latin American Alternatives
Faced with prohibitive delivery charges, Asian refiners are considering switching to Murban crude from the United Arab Emirates.
Cosmo Oil Charters VLCC as Others Use Aframax
Two traders and two shipping sources mentioned by Reuters reported that Japan’s Cosmo Oil tentatively secured a VLCC at $81 million for loading US crude between November 19 and 21. Meanwhile, South Korea’s SK Energy and Trafigura failed in their attempts to lock in VLCCs at rates ranging from $76 million to $77 million.
To manage high costs, some trading firms have switched to smaller-sized tankers. For an oil shipment heading to Japan on November 1, Trafigura locked in the Torm Hilde Aframax vessel—which holds roughly 600,000 barrels—at a cost of $24 million. In addition, a shipbroker informed Reuters that Vitol failed to complete its fixture for the Aframax tanker Riverside to haul US oil to South Korea early in November for $27 million.
Strait of Hormuz Workarounds Drive Up Rates
According to Sparta Commodities senior analyst June Goh in statements to Reuters, VLCC freight prices on routes going from the US Gulf to Asia and from Fujairah to the East have surged past 300% since the middle of August.
The reasons for such exorbitant increases in VLCC freight rates are the hugely inefficient ship-to-ship (STS) activities as a workaround to the Strait of Hormuz closure and increased Atlantic Basin arbitrage crudes into the Far East, leading to lower open tonnage available.
June Goh, Sparta Commodities
Steady demand for tankers on this route and expectations of further releases of US strategic petroleum reserves continue to support the elevated freight rates, a shipping analyst told Reuters. US oil sellers are expected to cut their offers to compete globally against regional alternatives.
Supply Security Concerns May Override High Delivery Costs
While the arbitrage window for US crude appears shut due to transport economics, industry participants have not yet resolved whether supply security concerns will ultimately override higher delivery expenses for all buyers. Trafigura declined to comment on the vessel fixtures, and other companies did not immediately respond to Reuters requests for comment.
As Sparta’s Goh pointed out to Reuters, the crude supply diversification strategy remains active so long as shipments through the Strait of Hormuz remain vulnerable to disruption. It remains unknown how long product crack spreads will need to remain elevated to keep overall refinery margins positive for Asian buyers absorbing the delivery cost increases.