Shipping Crisis Forces Asian Crude Buyers to Use Smaller Tankers

Record-high shipping costs are altering the behavior of Asian crude buyers, who are increasingly using smaller tankers and ships under long-term charter deals, according to refining and trading sources cited by Reuters. Freighter charges have surged to record highs this week due to the Iran conflict reshuffling trade routes and tying up supertankers in inefficient voyages and shuttle services to move crude through the Strait of Hormuz.

The additional oil flowing through the Strait of Hormuz, mainly through ship-to-ship transfers in the Gulf of Oman, is leaving very large crude carriers (VLCCs) in short supply for other vital oil trade routes, such as the U.S. Gulf Coast to Asia. Consequently, tanker costs are skyrocketing and significantly impacting buying and sourcing decisions for refiners in both Asia and Europe.

For instance, refiners in Asia face record-high freight costs to receive crude oil from the U.S. Gulf Coast, effectively closing the U.S. Gulf Coast to Asia arbitrage. Asian buyers are shifting towards Middle East crude but are purchasing on a delivered basis to mitigate costs. In Europe, refiners are opting for nearby volumes within the region because of the surge in tanker rates.

The heightened demand for European and Middle Eastern crude is driving up premiums on some grades. The Dated Brent benchmark reached a record $20 per barrel premium to Brent last week, with Norway’s medium sour crude Johan Sverdrup hitting a record $24 per barrel premium to Brent, per Wood Mackenzie data. Conversely, African and U.S. crudes have experienced discounts widening due to the high shipping costs to ship these volumes on lengthy voyages to Asia.

West African crude prices have plummeted to record-low discounts, with some grades reaching minus $20 per barrel to offset the high shipping expenses, according to London-based traders.