Soaring freight rates threaten Asia's appetite for US crude

• VLCC freight rates on US Gulf-Asia routes have spiked over 300% since mid-August, with shipping costs now at $40 per barrel versus $8.60 before the US-Israeli war on Iran began in February
• UAE Murban crude has become approximately $2 per barrel cheaper than WTI on a delivered basis to Asia, causing its premium to Dubai quotes to rebound above $11 per barrel
• Asian refiners and traders are shifting strategies by using smaller Aframax tankers or switching to Middle Eastern and Latin American alternatives like Murban and Medanito from Argentina

Summary

Key Development: Record-high tanker freight rates are making U.S. crude oil economically unviable for Asian refiners, forcing a shift to Middle Eastern and Latin American suppliers.

Critical Figures:

• VLCC (Very Large Crude Carrier) charter costs from U.S. Gulf to China hit $80 million in November, closing the arbitrage window
• Shipping costs surged to $40 per barrel from $8.60 before the U.S.-Israeli war on Iran began in February
• VLCC freight rates on U.S. Gulf-Asia routes spiked over 300% since mid-August
• Current shipping costs equal nearly half the price of a WTI crude futures contract

Market Impact:

Asian refiners are switching to alternatives, primarily UAE's Murban crude, which rebounded to an $11 per barrel premium over Dubai quotes. Murban is approximately $2 per barrel cheaper than WTI on a delivered basis to Asia. Other alternatives include Argentina's Medanito crude.

Transaction Activity:

• Japanese refiner Cosmo Oil provisionally chartered a VLCC for $81 million (Nov 19-21 loading)
• SK Energy and Trafigura's attempts to book VLCCs at $76-77 million were unsuccessful
• Trading firms switching to smaller Aframax tankers: Trafigura chartered one for $24 million; Vitol's $27 million fixture didn't proceed

Root Causes:

Inefficient ship-to-ship activities due to Strait of Hormuz closure and increased Atlantic Basin crude flows to Asia are reducing available tonnage.

Outlook:

Analysts expect U.S. oil sellers to cut offers and refiners to maintain diversification strategies despite closed arbitrage, given ongoing geopolitical risks affecting Middle Eastern supply routes.