Global Crude Freight Rate Surges

SUBSCRIBE SEARCH ARTICLES NEWS The global average crude freight rate surged above $20 per barrel, from $3 per barrel a year ago, analysts at Goldman Sachs said. Image by Suriyapong Thongsawang via iStock

The global average crude freight rate surged above $20 per barrel, from $3 per barrel a year ago.

That’s what analysts at Goldman Sachs, including Daan Struyven, said in a report sent to Rigzone by the Goldman Sachs team late Wednesday.

The analysts pointed out that, initially, the rally in crude freight rates began in the very large crude carrier (VLCC) segment and on Middle Eastern routes. They revealed in the report, however, that it has spread to all major crude trading routes, “particularly affecting long-haul voyages”.

“While most traded crude benchmarks do not directly include transportation costs in their prices (i.e., are priced on a Free-on-Board basis), high freight rates may reduce refiners’ overall demand for crude and/or skew it towards more closely located crude suppliers,” the analysts said.

Although the analysts highlighted in the report that global freight rates had edged down over the last few days, “likely on an easing in the risk premium”, they still pointed out that the global average remained seven times higher than a year ago.

“Focusing on freight fundamentals, we identify five drivers of the $20 per barrel year over year surge in the average global crude freight rate (14DMA) that will likely continue to support global freight rates as long as the conflict on the Middle East persists,” the analysts said in the report.

Outlining these five drivers, the analysts flagged “a high war risk premium in Hormuz (accounting for $7 per barrel or 1/3 of the increase in the global average crude freight rate)”, “ship-to-ship transfers outside the Persian Gulf that tie up tankers for longer”, which they said accounted for $4, “higher maritime fuel prices”, which they also said accounted for $4, “inefficient tanker allocation and an increase in tanker redirections”, which they said accounted for $3, and “the blockage of the Iranian fleet”, which they said “boosts demand for non-sanctioned crude tankers” and accounts for $2.

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“Overall, we see high freight rates widening crude price differentials by changing crude trading patterns and supporting refined product prices, while suppressing refiners’ net margins,” the analysts stated in the report.

“Crude producers with greater dependence on distant buyers may have to discount their crude more heavily to retain demand from refiners facing high transportation costs (e.g., producers in the Middle East selling to refiners in Asia or U.S. WTI sold to Europe or Far East Asia),” they added.

“Meanwhile, prices of crude from more centrally located producers (e.g. Brent in Northwestern Europe or ESPO in Russia) may gain from some demand reallocation,” they continued.

“Refiners with greater dependence on imported crude from distant suppliers (e.g. refiners in Asia) would have to either pass higher freight costs on to final consumers or accept lower net refinery margins,” they warned.

“Passing higher costs on to consumers is more challenging when final oil demand is more flexible because oil alternatives are widely available (e.g. EVs in China) or in economies where retail fuel prices are regulated,” the analysts highlighted.

“High freight costs have weighed particularly heavily on Asian refineries’ net margins, threatening their refined product output, which could then raise global refined product prices,” they went on to state.

Shipping Solves Problems

In an oil and gas report sent to Rigzone last Friday by the Macquarie team, Macquarie strategists, including Macquarie Energy Strategist Walt Chancellor, highlighted that “shipping solves problems”.

“Fundamentally it moves goods from one place where they are produced to a place where they are wanted,” the strategists noted, adding that “shipping itself is incredibly economical and uses relatively little energy compared to other forms of transport”.

The strategists warned, however, that “with sanctions and wars, the problems presented to shipping have become increasingly complex”.

“That’s good news for owners, because for once it’s not a race to the bottom in terms of rates,” they pointed out.

“The current trend really started with the Somali pirates and has grown to encompass Houthis, Russia/Ukraine, water issues in the Panama Canal, and the Strait of Hormuz,” they said.

“But the Gulf is a well-known region for the previous generation of ships given the experience of the ‘Tanker Wars’ between Iran and Iraq during the 1980s,” they noted, adding that hundreds of vessels were attacked.

“It was expensive, a lot of lives were lost, and there was a lot of pollution. But we made it through,” the strategists said.

“There are similarities today, effectively escorts for tankers (more in the form of helicopters and drones than frigates) juxtaposed with asymmetric Iranian tactics (more drones than fast boats/anti-ship missiles),” they noted.

“But what we’ve seen today is more of an unwillingness by owners to make the risky transit despite the high fees,” the strategists warned.

The Macquarie strategists went on to state that they generally see a limited set of owners and the GCC NOCs transiting.

“Fees for VLCCs have been eye-popping (up to $40 million), which given a newbuild VLCC might normally cost ~$140 million means potential payback in a matter of months with shuttle runs instead of 10 years of ‘normal’ markets,” they highlighted.

The strategists also outlined in the report that “real inefficiency comes from the way these vessels are being operated”.

“The most efficient system involves lots of planning, scheduling the arrival and loading, and then one continuous journey from load port to the destination port,” they pointed out.

“Instead, what is happening is a fleet of tankers is doing shuttle runs from inside the Gulf to the STS (Ship-To-Ship) transfer areas in the Gulf of Oman,” they said.

“The timing of these flows is very ad hoc, when the conditions permit, and the arrival in the STS locations is often without advance notice. As such, the receiving vessel needs to hang around either at the STS location or nearby (off the coast of Sri Lanka is popular),” they added.

“When the oil tankers pop out of the Gulf, these vessels then move alongside each other. Having two 330 meter long vessels maneuver to within a few meters of each other is no easy feat of seamanship and requires good weather,” they continued.

The strategists highlighted in the report that the shipping market is adjusting in real time.

“More tankers are heading to the Gulf, and more are willing to take the passage risk,” they said.

“But the impact is now syndicated across the tanker market, with freight rates (including the most famous TD3C) reflecting what is happening,” they warned.

“The impact on the oil market is twofold: physical oil deliveries cost more and our ability to close arb opportunities and optimize the market is hampered,” they said.

“An inefficient freight market causes a less efficient oil market,” they noted.

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MORE FROM THIS AUTHOR Andreas Exarheas
Editor | Rigzone