The increase in crude oil transportation costs to their highest level has forced Asian buyers to use smaller tankers. Crude oil transportation costs have reached new records in recent weeks due to changes arising from the war in Iran and shifts in trade routes.
Impact of the Iran War on the Oil Market
The war in Iran has disrupted trade routes and occupied large tankers with non-optimal and lengthy journeys. In this situation, large tankers (supertankers) wait for weeks to receive cargo outside the Strait of Hormuz. This has led to reduced access to Very Large Crude Carriers (VLCC) for other key global trade routes, including from the Gulf Coast to Asia.
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Change in Crude Oil Purchasing Patterns
With rising transportation costs, purchasing and sourcing decisions for crude oil by refineries in Asia and Europe have been affected. Asian refineries must pay very high transportation costs to receive crude oil shipments from the Gulf Coast, effectively making access to arbitrage deals between the Gulf Coast and Asia impossible. These buyers have turned to purchasing crude oil from the Middle East, but on a delivered basis to reduce costs.
In Europe, refineries have shown a preference for purchasing closer shipments within the region due to rising transportation rates. Increased demand for European and Middle Eastern crude oil has led to higher premiums for some grades of oil. For example, the premium for Dated Brent crude oil reached a record of $20 per barrel over Brent last week. Additionally, Norway's Forties crude oil reached a record premium of $24 per barrel over Brent.
Meanwhile, African crude oil and U.S. crude oil have faced reduced premiums, as high transportation costs for sending these volumes to Asia have increased discounts. Prices for West African crude oil have fallen to their lowest levels, with some grades dropping by up to $20 per barrel to compensate for high transportation costs.
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