Soaring freight rates threaten Asia’s appetite for US crude

Asia's demand for U.S. crude oil is facing challenges as freight rates soar to record highs, prompting refiners to explore alternatives from the Middle East and Latin America. Tanker freight rates for carrying 2 million barrels of U.S. oil from the Gulf of Mexico to China reached $80 million in November, making the economics of the route unviable.

Asian refiners are now considering switching to Murban crude from the UAE, whose premium rebounded to over $11 a barrel. This surge in freight rates translates to higher delivery costs for crude into Asian refineries, potentially denting product margins. Shipping costs are nearly half of the current price of a West Texas Intermediate crude future contract.

U.S. oil sellers may cut offers to compete globally, while some trading firms switch to smaller-sized tankers. Several refiners have provisionally chartered VLCCs for $81 million to $77 million, but unsuccessful attempts by SK Energy and Trafigura highlight the market's volatility. Despite the challenges, steady demand for tankers and expectations of further U.S. strategic petroleum reserve releases are supporting freight rates.

VLCC freight rates on the U.S. Gulf to Asia and Fujairah to East routes have spiked over 300% since mid-August, driven by inefficiencies in ship-to-ship activities, increased Atlantic Basin arbitrage, and the possibility of disruptions in the Strait of Hormuz.