Oil freight at $100,000 increases pressure on crude markets

Rising shipping costs are increasing pressure on physical oil markets which are already being hit by uncertainty surrounding a Russian crude price cap and weak Chinese buying.

Earnings on the industry’s benchmark trade route topped $100,000 a day on Monday, the highest level since early 2020 when Covid-19 caused a spike in tankers storing cargoes. With sanctions on Russia now forcing ships to take longer routes, depleting the pool of available ships, oil companies and traders have to pay ever higher prices to transport cargo. That adds to the cost of crude.

“Shipping has become a tangible drain” on the price of oil where it is loaded, compounding weak buying from China, said Viktor Katona, a lead crude analyst at Kpler, a data and analysis firm. In addition, there is “concern” on the part of buyers about the impact on the market of a cap on Russian oil prices, according to Katona.

Starting December 5, a cap will be imposed on Russian oil prices for companies wishing to access ships and services, including insurance provided by companies in the Group of Seven nations. The actual cap level has yet to be set, making it difficult for buyers to plan how much they might want to buy from Moscow.

The high freight rates earned by owners are also reflected in the high transportation costs per barrel for traders. Shipments from the US Gulf to China, one of the longest-distance main routes in the industry, are now around $6.60 a barrel, Baltic Exchange forward freight data compiled by Bloomberg shows. That’s almost three times what it was in February.

cargo surplus

Several Mediterranean crudes, trading at spreads to North Sea oil grade Dated Brent, have fallen at least $1.50 a barrel since a month ago, while more than 20 West African cargoes continue to struggle to find homes even after the offer prices were reduced several times. times.

A glut of crude shipments in Europe stemming from labor strikes across the continent “is depressing fast prices just as markets are buying barrels from further afield to shift to the Urals,” Russia’s main crude export, Kit said. Haines, an analyst at Energy Aspects Ltd.

“This means that any time you have an unplanned outage, your immediate crude builds up pretty quickly, and with China out of the market right now, there’s really nowhere to clean up,” he said.

Spot spreads are plunging in the Americas with US December cargo crude being offered at a discount of $7 to ICE Brent, compared to $2 a few weeks ago. Meanwhile, Castilla de Colombia has reached the largest discounts since the pandemic.

In Asia, spot premiums on several varieties of Middle Eastern crude, from Abu Dhabi’s flagship Murban to Qatar Marine and Oman, have plunged further for barrels loading in January, according to traders who they sell and buy these cargoes.

Back down

In typical months, Persian Gulf barrels are in more demand from Asian buyers when freight rates rise as refiners and traders look to those more local supplies rather than long-distance grades from the Atlantic basin.

However, rising shipping costs are being offset by falling spot premiums in the current cycle, including for crude from OPEC producers, traders said.

The West African crude market was hit hardest by rising freight rates, as more than half of its cargoes are shipped to faraway places like China and India. Nearly half of Nigeria’s December shipments have yet to find homes despite the January trading cycle having started.

In the Mediterranean, Caspian CPC Blend was offered at $5-$6 a barrel below benchmark Brent-dated, compared with a discount of $3.50-$4 a month ago.

Reduced tanker availability not only causes increased freight rates, but also increases demurrage rates – the costs of delays in and around ports. Demurrage costs for so-called very large crude carriers are now estimated at around $120,000 to $130,000 a day, up about $50,000 from two months ago, shipping brokers said.

To minimize that, many freight forwarders try to arrive at ports just in time for cargo, increasing the chance of unforeseen delays.

A cargo of North Sea oil has been loaded onto a VLCC from Hound Point in Scotland nearly five days behind schedule, a delay rarely seen at this terminal, people with knowledge of the matter said.

the return of china

The drop in purchases from China has bought Europe more time as it seeks to figure out how to replace around 800,000 barrels a day of Urals crude, Russia’s flagship, after the EU embargo on imports from the producer of the OPEC+ takes effect in two weeks, said Haines, who expects China to get back in earnest in the spring.

“Chinese buying is tepid for now, which will soften the blow,” he said. “But once China is back in the market, probably for second quarter barrels, China will be the key variable for 2023 stocks.”

That being said, some traders believe that prices have already sunk enough to spur more buying in Asia. Sales of barrels of Brazilian crude delivered in January and February to China rose as sellers cut the asking price to the level that Chinese state oil companies and South Korean refiners were bidding.

© 2022 Bloomberg L.P.

Leave a Reply

Your email address will not be published.