The global average crude freight rate has climbed above $20 per barrel, from $3 a year ago, according to Goldman Sachs analysts. They identify five drivers of the jump and say that high freight costs could reshape crude price differentials and squeeze refiner margins.
Goldman Sachs analysts put the global average crude freight rate above $20 per barrel, up from $3 per barrel a year ago. The analysts said the rally began in the very large crude carrier (VLCC) segment and on Middle Eastern routes, but has since spread to all major crude trading routes, particularly affecting long-haul voyages.
Rates have edged down over the last few days, likely on an easing in the risk premium. Even so, the analysts said the global average remained seven times higher than a year ago.
Five drivers behind the surge
The analysts identified five drivers of the $20 per barrel year-over-year increase. A high war risk premium in Hormuz accounts for $7 per barrel, or 1/3 of the increase. Ship-to-ship transfers outside the Persian Gulf, which tie up tankers for longer, account for $4, and higher maritime fuel prices account for another $4.
Inefficient tanker allocation and more tanker redirections account for $3, according to the report. The blockage of the Iranian fleet, which boosts demand for non-sanctioned crude tankers, accounts for $2. The analysts said these drivers will likely continue to support freight rates as long as the Middle East conflict persists.
Crude differentials and refiner margins
Most traded crude benchmarks do not include transportation costs, but the analysts said high freight rates may reduce refiners' overall demand for crude or skew it toward closer suppliers. Producers that depend on distant buyers may have to discount their crude more heavily, such as Middle East sellers supplying Asian refiners or U.S. WTI sold to Europe or the Far East.
By contrast, Brent in Northwestern Europe and ESPO in Russia may gain from some demand reallocation, the analysts said. High freight costs have weighed particularly heavily on Asian refineries' net margins, threatening refined product output, which could then raise global refined product prices.
Macquarie sees shipping inefficiency
Macquarie strategists, in a separate report, said the way tankers operate adds to the problem. A fleet is doing shuttle runs from inside the Gulf to ship-to-ship transfer areas in the Gulf of Oman, and the timing of these flows is very ad hoc. They also said fees for VLCCs have been up to $40 million, against what a newbuild VLCC might normally cost, ~$140 million.
The strategists said the effect on the oil market is twofold: physical oil deliveries cost more, and the ability to close arbitrage opportunities is hampered. Macquarie noted: "An inefficient freight market causes a less efficient oil market."
Source: Rigzone
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