U.S. Oil Shipping Costs to China Hit $40 a Barrel, Undermining Competitiveness
Key Facts
The cost of shipping U.S. crude from the Gulf of Mexico to China reached $40 a barrel, compared with $8.60 before the U.S.-Israeli war on Iran, according to a Reuters report published on October 9. The agency described crude tanker rates as being at "record levels," as transportation costs push Asian refiners to seek alternatives to U.S. crude. The comparison with pre-war rates represents an increase in the burden borne by U.S. cargoes reaching the Chinese market, with transportation factored into the delivered cost per barrel. Some trading companies have already begun switching to smaller tankers in response to rising shipping costs, according to traders and a shipbroker who spoke to Reuters. June Goh, an analyst at Sparta Commodities, attributed the rise in rates to ship-to-ship oil transfers used to bypass disruption in the Strait of Hormuz. Goh described these operations as "highly inefficient," explaining that they reduce the availability of vessels to transport oil.
Alternatives that Asian refiners may buy more of include the United Arab Emirates' Murban crude and Argentina's Medanito crude, according to traders cited by Reuters in its October 9 report. An oil analyst at a trading company estimated that Murban was about $2 a barrel cheaper than West Texas Intermediate on a delivered basis to Asia. That advantage concerns the price including delivery to Asian refineries, a comparison that factors shipping costs into competition between the two grades. As refiners explored switching to Murban, its premium to Dubai prices rose to more than $11 a barrel in the Thursday session preceding the report's publication, according to Reuters. The premium rose as buyers turned to the Emirati crude, while Medanito remained among the other alternatives traders cited for refiners seeking replacement supplies.
Against the backdrop of these shifts, U.S. crude exports rose in September, according to S&P Global Commodities at Sea data published on October 8. Total exports reached 3.5 million barrels per day, compared with 3.4 million barrels per day in August. Flows to Northeast Asia rose to 1.1 million barrels per day in September from 793,000 barrels per day in August. S&P Global attributed the increase in flows to Asian regions to cargoes contracted before the surge in tanker rates. Previously agreed cargoes thus arrived following purchasing decisions that predated the rise in transportation costs, while the rate levels Reuters subsequently reported prompted trading companies to change the sizes of tankers used.
On the U.S. supply front, commercial crude oil inventories fell by 3.1 million barrels in the week ended October 16, according to the U.S. Energy Information Administration. Inventories stood at 412.5 million barrels after the decline. That figure covers commercial inventories excluding the Strategic Petroleum Reserve, according to the agency's definition in its weekly summary. Crude inventories were 3% below the five-year average. In the same week, U.S. gasoline inventories fell by 3.0 million barrels to 5% below the five-year average, according to the official summary.
An update published by Reuters on October 16 showed supertanker rates on the Gulf of Oman-to-China route declining after reaching a record peak the previous week. Rates on the route fell to about 776 Worldscale points, according to Baltic Exchange data cited by the agency. They had reached 841 points the previous week, the highest level since the route's index was launched. Michael Ryan, an analyst at Sparta Commodities, said U.S. administration comments about potentially lifting sanctions on some shadow fleet tankers helped lower freight rates. Ryan linked that to an increase in the number of vessels available to transport oil if sanctions on those tankers were lifted.
Looking ahead, the prospect of an expansion in tanker supply is tied to the lifting of sanctions discussed in the U.S. administration's comments, according to Ryan's explanation of freight rate movements. On the crude purchasing side, options raised by traders include greater reliance on Murban and Medanito among Asian refiners. U.S. inventories remain subject to regular monitoring through Energy Information Administration releases, with Wednesday the usual publication day for its weekly petroleum report. The report is normally released at 10:30 a.m. Eastern Time, according to the agency's schedule. The next weekly release follows declines in crude and gasoline inventories in the week ended October 16.