Record freight rates are reshaping Asian refiners' crude supply strategies, leading to a preference for smaller Aframax tankers.
The record levels of freight rates in international oil transportation have led Asian refiners to change their crude oil supply strategies. Rising transportation costs due to security issues in the Strait of Hormuz and a tightening tanker supply have prompted refiners to use smaller Aframax tankers instead of very large crude carriers (VLCCs), enter into long-term charter agreements, and adopt delivery-based oil purchasing practices.
The increase in exports from Middle Eastern oil producers in September and the intensification of ship-to-ship oil transfers through the Strait of Hormuz have caused serious capacity congestion in the tanker market.
Approximately 80 VLCC tankers have been deployed in Hormuz.
Kieran Gallagher, Asia President of international energy trading company Vitol, stated that approximately 80 VLCC tankers are being used in shuttle services for oil transportation around the Strait of Hormuz.
The prolonged presence of these vessels in the region has reduced the number of tankers available for use on other international routes, leading to a rapid increase in freight rates.
It has been reported that the cost of transporting crude oil from the United States to Asia has risen to as high as $40 per barrel.
The increase in attacks on vessels in the Middle East and the rising risk premiums for war have also put additional pressure on transportation costs.
In response to rising freight rates, Asian oil refiners have begun to use Aframax-class vessels, which can carry approximately 600,000 barrels of oil, more frequently instead of VLCC tankers, which have a capacity of about 2 million barrels.
Although large tankers typically have an advantage in economies of scale, the current market has seen the per-barrel transportation costs of Aframax and VLCC shipping converge.
Taiwan's state-owned oil company CPC, which usually purchases two or three VLCC loads per month, made six Aframax load purchases last week.
SK Energy, one of South Korea's leading refiners, chartered the Aframax tanker named Samos for $23 million to load crude oil from the United States at the beginning of November.
Asian refiners are also focusing on long-term charter agreements to protect themselves from high freight rates in the spot market.
K.Y. Lin, President of Taiwan-based Formosa Petrochemical, noted that it has become economically challenging to bring crude oil from the U.S. and Africa to Asia due to high transportation costs.
Lin stated that the number of companies renting tankers from the spot market, aside from Middle Eastern oil producers, remains limited, and Asian buyers are benefiting from long-term chartered vessels to reduce their costs.
High freight rates are also changing the structure of crude oil sales contracts.
Some Asian refiners are shifting towards agreements based on receiving oil at the destination rather than directly undertaking tanker chartering and transportation organization.
The Abu Dhabi National Oil Company (ADNOC) has sold some crude oil batches to China and India under delivery-based contracts to be loaded in the next two months.
Saudi Arabia's state oil company Saudi Aramco also employed a similar method for some deliveries to Asian customers next month.
In these agreements, the organization of maritime transportation and freight costs are borne by the seller. However, these expenses can be reflected in the total sale price of the oil.
The increase in freight rates has also widened regional price differentials in oil trade.
The reduction in crude oil imports from distant regions by Asian and European refiners has weakened demand for U.S. and West African oil.
According to assessments by London-based oil traders, the price differentials for some West African crude oil types have fallen to as low as minus $20 per barrel to offset high freight costs.
European refiners' shift towards nearby crude oil sources has increased demand for North Sea oil.
Price premiums in the Dated Brent benchmark exceeded $20 per barrel last week, reaching record levels.
Although rising tanker freight rates are narrowing the profitability margins of refiners, production activities are ongoing.
K.Y. Lin, President of Formosa Petrochemical, stated that high transportation costs have consumed a significant portion of refinery gross margins, but production must continue due to existing contractual obligations.
It has been noted that after accounting for freight and insurance costs for Middle Eastern oil, net refinery margins still remain above $10 per barrel.
Morgan Stanley analysts assessed that crude oil demand has remained resilient against rising transportation costs due to high refinery margins and low oil inventories.
The developments in the tanker market indicate that maritime transportation costs have become one of the key factors determining not only logistics expenses but also which countries crude oil is purchased from and under what contractual conditions.
Source: SeaNews Türkiye
