US crude oil exports to Asia could fall to a seven-year low as record tanker freight costs weaken the economics of shipping barrels from the US Gulf Coast to Asian refiners.
Asian refinery orders for US crude scheduled for November delivery were estimated at 24 million to 26 million barrels, down by about 50% from the previous month, according to traders cited in the source. If this pace continues through the end of the trading cycle, volumes would reach their lowest level in seven years, based on ship-tracking data from Kpler and Vortexa.
Context: Tankers Intelligence File · Tanker freight rates explained
The main pressure on the trade has been the sharp increase in tanker rates after the US-Iran conflict disrupted shipping. Freight costs for the US Gulf Coast-to-China route had risen to nearly $60 million as of Thursday, according to Baltic Exchange figures. Rates had earlier reached $79.6 million, compared with an average below $8 million during the five years before the conflict.
Operational context
The cost of chartering the largest crude carriers for the approximately 30-day voyage has become equivalent to around half the cost of building a new vessel, according to the report. With crude trading at around $100 per barrel, freight is adding a significant burden to delivered costs for Asian buyers.
Valero Energy’s head of oil trading, Randy Hawkins, said freight rates had become the central issue in the market. He estimated that moving crude from the Gulf Coast to Asia was costing refiners about $30 to $35 per barrel, as much as seven times last year’s cost.
While the November trading cycle still allows scope for additional purchases, Vortexa said it did not see evidence of an imminent increase large enough to materially lift Asia-bound US crude volumes. One unnamed market participant said post-cycle transactions could potentially raise November shipments to as much as 40 million barrels.
High freight costs are also affecting US crude differentials. Export-bound Permian Basin crude at the Magellan East Houston hub was trading at a premium of 25 cents to benchmark futures as of Wednesday, down from more than $3 six weeks earlier. The premium for Mars, a medium sour Gulf of Mexico export grade, had fallen to $6 from $17.50 in late March.
The disruption has also tightened tanker availability. Hawkins said smaller vessels were increasingly being used to load crude in the Persian Gulf, where they were considered less exposed to Iranian fire in the Strait of Hormuz. Cargoes are then transferred to larger vessels waiting in the Gulf of Oman, a process that ties up more ships and increases the number of tankers needed to move the same volume of oil.
Insurance costs and higher fuel prices are adding to freight expenses, while elevated tanker rates are reducing the incentive for Asian refiners to source crude from the US Gulf Coast.