Asian oil refiners are grappling with a jump in global freight rates that shows no sign of abating, driving up costs of crude imports from all regions in the fourth quarter, industry officials said.
The cost of shipping crude from the Americas, Europe, Africa and the Middle East to Asia has surged over the past two weeks as companies shunned nearly 300 tankers on fears of violating sanctions against OPEC members Iran and Venezuela.
Higher freight rates and a jump in crude premiums after the Saudi oil attacks in mid-September have so far added about $3 a barrel to November-lifting oil cargoes from the Middle East to China, trade and shipping sources said.
Oil tanker freight rates are expected to keep rising while COSCO Dalian’s ships remain under sanctions, the sources said. The United States imposed sanctions on units of the Chinese shipper, alleging involvement in ferrying crude out of Iran.
“We’ve been in a net loss for most months so far this year, and the fourth quarter doesn’t look good either, as premiums for Middle Eastern grades are high and freight rates have more than doubled,” an official with a Chinese state-owned refinery said.
Refining margins in China will remain squeezed at least in the near term as its domestic fuel pricing tracks only the weighted average of global benchmark Dubai, West Texas Intermediate and Brent prices, excluding premiums and freight costs, he said.
In contrast, Indian refiners want refined fuel cracks to gain further to offset the impact of rising freight as pump prices of gasoil and gasoline are linked to their benchmarks in the Arab Gulf and Singapore.
“If this freight rate is not compensated by an increase in product cracks, then it is going to affect margins,” said R. Ramachandran, head of refineries at India’s Bharat Petroleum Corp.
The increase in shipping rates has also dented Asia’s demand for arbitrage supplies from the United States, West Africa and Europe.
“A West African oil shipping fixture that we used to do for $3 million to $4 million has gone up to $8 million to $9 million,” a source at one of the Indian refineries said.
Record shipping rates and a narrowing Brent-WTI price spread have shut the arbitrage window for U.S. crude to Asia.
Very large crude carrier (VLCC) freights for West African crude to China and India have more than doubled.
An official at Indian Oil Corp said the Brent-WTI spread had to be at least $6 a barrel for U.S. crude to flow to India but higher freight had further upset the economics.
“Refiners are looking at buying more short-haul oil, but Middle Eastern oil is mostly limited by OPEC quotas so there is not much choice for us,” the IOC official said.
BPCL’s Ramachandran said the impact of higher freight rates would be accentuated for long-distance cargoes from the United States and Africa unless product cracks rose or oil prices dropped to make those crudes attractive.
The cost of sending a VLCC from the U.S. Gulf Coast to South Korea, Asia’s top buyer of U.S. oil, hit a record $14 million this week.
“If freight rates stay this high – and they are unusually high because of this issue over sanctions – then U.S. crude prices have to fall, to get the Brent-WTI spread to widen to accommodate exports,” Morningstar analyst Sandy Fielden said.
The heads of Gunvor and Vitol said this week that ships queuing to install scrubbers, units that remove sulphur from shipping fuel, had added to the tightness as the process sometimes kept vessels out of the water for a month or more.
Oil traders have also held back offers to deliver spot crude to eastern China’s Shandong, home to most of the independent refiners that account for a fifth of the country’s imports.
“It’s hardly worth trying to offer something now if you’re showing dated Brent plus $6 or $7 including freight. It’s just getting silly,” a West African trader said.
Asian refiners hope product margins will rise due to stronger demand from a switch to cleaner fuels in 2020 and cover the rise in crude costs.
Some are sceptical, however, because of sluggish demand.
“Expectations were high that refining margins would improve from the fourth quarter,” said an official at the Korea Petroleum Association, which represents South Korean refiners.
“But recently there have been some concerns that this would be limited because not every country is implementing the new shipping fuel rules,” the official said.
Refinitiv analyst Ehsan Ul Haq said: “Higher landed cost of crude will have a negative impact on refining margins unless refined product prices rise.”
“But given sluggish demand, it looks unlikely that product cracks will rise further,” he added.