Rising shipping costs are piling pressure on physical oil markets that are already hit by uncertainty surrounding a cap on Russian crude prices and weak Chinese buying.
Earnings on the industry’s benchmark trade route exceeded $100,000 a day on Monday, the most since early 2020, when Covid-19 caused a surge in tankers storing cargo. With sanctions on Russia now forcing ships to take longer routes, drying up the pool of available vessels, oil companies and traders are having to pay ever higher prices to transport cargoes. This adds to the cost of crude oil.
“The shipment has become a tangible drain” on the price of oil where it’s loaded, exacerbating weak buying from China, said Viktor Katona, chief crude oil analyst at Kpler, a data and analytics firm. Also, according to Katona, there is “trepidation” on the part of buyers about the market impact of a cap on Russian oil prices.
From December 5, a cap will be placed on Russian oil prices for companies wishing to access ships and services, including insurance provided by companies from Group of Seven nations. The actual cap has not yet been set, making it difficult for buyers to plan how much they might want to buy from Moscow.
The high freight rates that owners are earning are also reflected in the high freight costs per barrel for the traders. US Gulf shipments to China, one of the industry’s longest major routes, now cost about $6.60 a barrel, according to Baltic Exchange forward freight data compiled by Bloomberg. It’s nearly three times where it was in February.
Several Mediterranean crudes, trading at differentials to dated North Sea Brent, were down at least $1.50 a barrel from a month ago, while more than 20 West African cargoes continue to struggle to find homes even after that the offer prices have been cut several times. times.
A glut of crude to Europe resulting from worker strikes across the continent “is depressing rapid prices just as markets are sourcing barrels from further afield to change the Urals,” Russia’s top crude export, he said Kit Haines, analyst at Energy Aspects Ltd.
“That means whenever there is an unplanned outage, fast crude is restored pretty quickly, and with China out of business right now, there’s really nowhere to write off,” he said.
Spot spreads are collapsing in the Americas with US crude for loading in December offered at a $7 discount at ICE Brent, down from $2 a few weeks ago. Meanwhile, Colombian Castilla hit its largest discounts since the start of the pandemic.
In Asia, spot premiums on various varieties of Middle Eastern crude, from Abu Dhabi’s flagship Murban to Qatar Marine and Oman, declined further per barrels loaded in January, according to traders buying and selling these cargoes.
In typical months, barrels from the Persian Gulf are more in demand with Asian buyers as cargoes increase, as refiners and traders look for those more local supplies rather than long-haul grades from the Atlantic Basin.
Rising shipping costs, however, are offset by declining spot premiums in the current cycle even for OPEC producers’ crude, traders said.
The West African crude market has been hardest hit by the surge in freight as more than half of its cargoes are shipped to distant locations including China and India. Nearly half of Nigeria’s cargoes for December have yet to find homes, even as the January trade cycle has begun.
In the Mediterranean, Caspian CPC blend was offered at around $5-6 a barrel below dated benchmark Brent, compared with a discount of $3.50-4 a month ago.
Reducing tanker availability not only causes freight rates to soar, but also increases demurrage fees, the costs of delays in and around ports. Demurrage costs for so-called very large crude carriers are now estimated at about $120,000 to $130,000 a day, up about $50,000 from two months ago, ship brokers said.
To minimize this, many cargo lifters are trying to get to the ports just in time for loading, which increases the risk of unforeseen delays.
A cargo of North Sea oil was loaded onto a VLCC from Hound Point in Scotland nearly five days later than scheduled, a delay rarely seen at this terminal, knowledgeable people said.
The return of China
China’s slump in buying has bought Europe more time as it tries to figure out how to replace some 800,000 barrels a day of Russia’s top Urals crude after the EU’s import embargo on producer OPEC+ takes effect in two weeks, Haines said, that he 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 returns to the market, probably for Q2 barrels, China will be the key variable for 2023 balances.”
That said, some traders believe that prices have already fallen enough to stimulate further buying in Asia. Sales of barrels of Brazilian crude delivered to China in January and February increased as sellers lowered their asking price to the level offered by Chinese state-owned oil companies and South Korean refineries.
–With assistance from Serene Cheong.
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