Asia crude oil refiners pay the price for U.S. sanctions

Asia crude oil refiners pay the price for U.S. sanctions

Asian refiners are once again paying the price for the ongoing battle between the United States and Iran, with the effective price of crude oil being kicked higher by a sharp rise in tanker freight costs. And the bad news for refiners is that the rise in the price of delivered crude may be more sticky than previous spikes caused by factors that proved temporary, such as the strikes on Saudi Arabia’s oil installations and attacks on tankers in the Middle East, Reuters writes in the article Column: Asia crude oil refiners pay the price for U.S. sanctions on China ships - Russell.

Freight rates for shipping crude have surged since the administration of U.S. President Donald Trump slapped sanctions on Chinese tanker companies for carrying Iranian crude in violation of sanctions against Tehran. Some routes have seen charges surge to record highs, adding several more dollars per barrel to the delivered cost of crude oil. Given Asian refiners rely heavily on long-distance supplies from the Middle East, Africa and the United States, the rise in freight costs will hit them disproportionately. For example, South Korea’s top refiner SK Energy chartered a supertanker, Maxim, to ship U.S. crude to South Korea in November for $10 million, the highest price for a U.S. Gulf-to-Asia shipment ever, Reuters reported on Oct. 2, citing two sources familiar with the matter. This rate was about 61% higher than the $6.2 million being paid for the same charter at the beginning of September.

Assuming the tanker is a Very Large Crude Carrier (VLCC) capable of carrying about 2 million barrels of oil, the increase in freight rates in little over a month has added about $1.90 per barrel to the cost of shipping crude from the United States to Asia. Rates from the Middle East and Africa to Asia have also been affected, but not by quite the same margin, with brokers reporting increases around 20% to 30% in recent weeks. The cost of chartering a VLCC from the Persian Gulf to China rose to an 11-year high on Wednesday of $27.29 a metric tonne, equivalent to about $3.74 a barrel, S&P Global Platts reported. The rise in freight rates also means that crude that travels longer distances will be disadvantaged the most. The cost of shipping a barrel a crude from the United States to North Asia is now around $5, or about $1.20 more than the cost of a barrel from the Middle East.

Trump disruption

It’s perhaps ironic that the Trump administration’s sanctions on Chinese shipping companies will hurt U.S. crude exporters to Asia more than it does their competitors. Already it appears that U.S. cargoes to Asia are fading away, having likely reached a record high this month. A total of 49.3 million barrels of U.S. crude is expected to arrive in Asia this month, up from just 28 million in September and 41.3 million in August, according to vessel-tracking and port data compiled by Refinitiv. However, November arrivals are expected at 31.9 million barrels, and while this figure may increase if more cargoes are fixed, the window for November cargoes is closing rapidly, given it takes around six weeks to sail from the U.S. Gulf coast to North Asia.

The increased freight rates imply that if U.S. exporters want to remain competitive in Asia, they may have to widen the discount they are offering. Physical West Texas Intermediate (WTI) delivered in Houston, as assessed by commodity price reporting agency Argus, was at $55.67 a barrel on Wednesday, while Brent cargoes ended at $58.28, a premium of $2.61.

There is also the risk that freight rates remain elevated for an extended period, given that neither the United States nor Iran show any signs of backing down or compromising in their dispute over Iran’s nuclear program. Whether the four Chinese shipping companies now under U.S. sanctions can get them lifted may also be doubtful, given the strained relationship between Beijing and Washington amid the ongoing trade dispute.