Freight has always been included in the total cost of delivering oil; but currently high tanker rates are making the cost of transporting crude oil into a market factor that can influence where refiners purchase their oil, how much they pay for it, and the extent of control that producers actually have over the final price.
On Sunday oil traders kept a close eye on OPEC+. Perhaps they were paying attention to the less significant figure. On October 4, OPEC announced that Saudi Arabia, Russia, Iraq, Kuwait, Kazakhstan, Algeria and Oman would maintain the production levels they were required to achieve in September 2026 also in November. Usually, a decision by some of the world’s largest oil producers would take centre stage in the debate over where crude prices were heading.
However, another cost has been soaring mostly outside the notice of the public. On certain routes the rates for very large crude carriers, or VLCCs, have hit a figure of $1.3 million per day, Gulf News has reported, the source citing data from the shipping broker Poten & Partners. This amount is about 43 times the daily benchmark of around $30,000 that was mentioned for early January.
Poten’s estimate shows the freight charge coming in at nearly $33 per barrel of crude, as compared to just $1.73 per barrel in January. It should be noted that the $1.3 million figure is not a general tanker rate since different ships, routes, cargoes and risk profiles result in different prices. However, the trend is clear. There has for a long time been a second price in the oil market, and nowadays it is becoming impossible to ignore.
Britain’s Stock Market Is Rising as Household Costs Threaten to Climb →
The notion that shipping constitutes an additional cost is nothing new; according to the International Energy Agency’s oil market glossary, there is a distinction made between FOB transactions, in which the buyer is responsible for transport and insurance, and CIF transactions, in which the cost, insurance and freight are included in the transaction. A barrel of oil left at an export terminal is not the same thing economically as one that has been safely delivered to a refinery thousands of miles away.
In most cases, the distinction hardly draws any notice beyond the fields of commodities and shipping since the amount of freight is fairly small in comparison to the value of the oil itself. This relationship has changed considerably. According to the figures given by Gulf News, about $120 for the crude oil plus approximately $33 for freight amounts to around $153 per barrel before certain extra costs are taken into account. In that simple example the freight is equivalent to about 27.5% of the $120 crude price, or roughly 21.6% of the total amount when the crude and freight are combined.
The fact that there is this distinction is important since it avoids making an exaggerated statement. It is not the case that shipping has all at once come to account for 27% of every barrel delivered somewhere in the world; rather, the extreme routes are showing that transportation can now add tens of dollars to the cost of moving a barrel. Lloyd’s List stated that the VLCC market in September was entering uncharted territory; on September 11 the Middle East Gulf-to-China index reached $982,072 per day, whilst Clarksons had the same route valued at over $1 million per day. Erik Broekhuizen, manager of marine research and consulting at Poten & Partners, summed up the situation by saying: “What is happening is truly unprecedented.”
This results in an odd oil market situation in which crude oil is available underground, buyers do want it, and refineries have a demand for it, but the ships linking the producers and the buyers can become so scarce as to have a real effect on the trading of the oil.
Middle East Conflict Cools Cyprus Business Lending as Companies Pull Back →
The issue is not simply the daily rental rate for a tanker; it is that security risks are altering the physical structure of the market. According to Gulf News, the disruption in the area of the Strait of Hormuz has led to ships taking longer routes, increasing the number of ship-to-ship transfers and raising war-risk costs, while at the same time tying up tanker capacity; a VLCC has a capacity of about 2 million barrels, which means that the removal of even a relatively small number of suitable vessels from normal trading patterns can have a large effect.
The danger is still very real; on October 4, TradeWinds reported that the Lipsi, a tanker operated by Dynacom which had only just been delivered six weeks earlier, suffered engine-room damage after having been hit by a projectile in the Strait of Hormuz. The result in the financial area is a feedback loop.
Because of the dangers involved, some owners are less likely to enter certain waters. With fewer ships available, freight prices rise. The longer the routes are, the more time ships spend on them. Ship-to-ship transfers call for extra capacity and coordination. As a result, higher delivered crude costs can cause refiners to find some oil grades and some producing countries less attractive.
There is evidence from India that such an adjustment is already taking place. According to a report by The Financial Express, Indian crude oil imports from West Asia increased by 74% on a monthly basis in September, reaching 2.10 million barrels per day. The practice of ship-to-ship transfers contributed to maintaining oil supplies from the Gulf even in the face of the risks associated with Hormuz. The proportion of crude oil imported from West Asia rose to 39.5%, whereas imports of Russian crude fell.
What this implies is that the shipping problem doesn’t merely prevent oil from being transported, since it can also affect the way in which oil is transported, the places from which it is transported, and in the end determine which barrels become economically competitive. Which is why OPEC’s production figure by itself no longer gives the whole picture.
Why the Global Stock Market Outlook Has Investors on Edge →
There is an important counterargument. The fact that tanker rates are at a record high does not imply that freight has become a second oil benchmark or that OPEC has lost control of the oil market; shipping markets are capable of sudden reversals. The same forces which are causing freight rates to rise could eventually cause them to fall again. A decrease in security risks might lead to ships once more using their normal routes. With more tonnage available, the owners’ ability to set prices would be reduced. Furthermore, high prices for crude oil and for transportation could also make certain refinery purchases unprofitable.
As Lloyd’s List points out, there is in the end a limit; if the amount that freight takes from what refiners can earn by turning crude oil into products becomes too great, then the refiners will cut back on their activities or the consumers will start to respond to the higher prices. That serves as the natural limit.
There is historical evidence that, during times of crisis, the tanker markets can take unexpected turns. S&P Global stated in March that VLCC rates had initially risen following the disruption in the Gulf, but then came under downward pressure as the ships left the area and repositioned themselves in other markets. The idea is not that shipping has permanently taken over crude supply as the main factor in oil prices. The more defensible one is the more interesting.
For many years the world has placed great emphasis on the number of barrels that producers pump. The present tanker squeeze shows that having a barrel available and having a barrel that can be delivered economically may turn out to be two entirely different situations. OPEC is due to meet once more on November 1st. Traders will keep a close eye on the production targets. They too should keep an eye on the ships.
If the rates for VLCCs stay close to their historic levels even though Gulf crude is still being shipped, this would indicate that the bottleneck in the oil market has changed. The thing in short supply would then be nothing merely the barrel itself.
It would likewise be the ability to move it.