Freight surge traps Americas heavy crude as Asia chases supply

Brent crude, the global benchmark for oil, has surged above $100 per barrel. Yet, an unusual excess of heavy crude, used to create diesel and gasoline, is accumulating in North and South America. Freight costs for tankers have skyrocketed since the U.S.-Iran war, making it difficult to transport surplus heavy crude from the Americas. North and South America have seen a rise in crude supply, but refineries in the region lack additional processing capacity, leading to mounting inventories.

Heavy crude, denser and cheaper than light crude, has been utilized by refineries to reduce production costs and increase profitability. However, refiners in Asia and Europe have found it challenging to acquire heavy crude despite falling prices, primarily due to a steep increase in tanker freight rates. Last week, shipping costs to Asia reached $80 million per barrel, nearly five times the initial $10 to $15 million in early 2022.

Shipping to Europe also experienced surges, with costs estimated at $46 million per barrel, seven times the rates from February.

The surge in tanker freight rates is attributed to dwindling tanker availability. The U.S.-Iran war has led to continuous ship-to-ship transfers in the Gulf of Oman, tying up numerous tankers. As fewer vessels are available for other routes globally, freight rates have soared. Scott Shelton, an energy specialist at TP ICAP, emphasized the impact of shipping costs, stating, "There is demand for tankers, but rates are rising and the number of available vessels is shrinking."

As shipping expenses rise, prices for heavy crude from the Americas have dropped. Key heavy crude grades from Canada, Colombia, and Ecuador have declined more than $10 per barrel to a six-week low. As of the 8th, excluding freight and insurance, Canada's Western Canadian Select (WCS) traded around $74 a barrel, Colombia's Vasconia at $84, and Ecuador's Oriente at $76.

Despite falling prices for heavy crude from the Americas, the global benchmark for crude remains above $100 per barrel. The widening supply-demand imbalance between production sites and consumers has intensified, with crude supply increasing but refining capacity lacking. U.S. refinery utilization stands at its highest in 28 years, with the average weekly utilization rate at about 93.5%. U.S. refiners are maximizing output to secure revenue amid a spike in diesel prices.

Gulf Coast refiners have acquired as much heavy crude as they can handle, with constraints including overall refinery utilization and the types of crude that can be processed. Some U.S. refineries, designed for Mars Sour crude produced offshore in the Gulf of Mexico, need spare capacity in coker units to handle Canadian or Venezuelan heavy crude by blending in lighter grades.

Consequently, the Americas are grappling with oversupply and falling prices for heavy crude, despite global oil prices remaining high, due to bottlenecks in both shipping and refining.