Elevated freight costs are cutting into the arbitrage that has made US crude attractive to Asian refiners, even as buyers continue securing cargoes to cover the shortfall from Gulf supply disruptions. The closure of Saudi Arabia’s East-West pipeline earlier this month, alongside the broader disruption to Strait of Hormuz traffic, has left Asian buyers more reliant on non-Gulf barrels including US grades.
Shipping costs on the route have been described as running at or near record levels, reflecting the same tightness in the very large crude carrier market that has pushed Middle East to Asia freight sharply higher this year. Japan is especially exposed given it imports the vast majority of its oil, with around 95 percent sourced from the Middle East and roughly 70 percent of total supply passing through the Strait of Hormuz.
The Nikkei 225 has already been under pressure through the disruption, falling for three straight sessions earlier this month as rising oil prices, a firmer yen, and concerns over a near certain Bank of Japan rate hike weighed on sentiment. Even with the added shipping cost, market participants say US crude has remained competitive on a landed basis in Asia relative to alternative supply, though that margin is being squeezed as freight keeps climbing. A sustained rise in freight, layered on top of already elevated crude prices, would add further pressure on Japanese import costs and could weigh further on risk appetite in Tokyo if the disruption drags on.
—Record freight costs are squeezing, but not yet closing, the window for US crude sales into Asia.
Summary:
- Freight costs for shipping US crude oil to Asia have surged to what shipping market data describes as record or near record levels
- The increase reflects the broader disruption to Middle East oil shipping caused by the region’s ongoing conflict and the closure of the Strait of Hormuz
- Saudi Arabia closed its East-West pipeline earlier this month after attacks on the line, adding to concerns about alternative export routes
- Asian refiners are continuing to charter tankers for US crude despite the higher freight cost, seeking to cover the shortfall from disrupted Gulf supply
- Market participants say US crude has so far remained price competitive on a landed basis in Asia even as freight costs climb
The cost of shipping US crude oil to Asia has climbed to what shipping market data describes as record or near record levels, as ongoing disruption to Middle East supply routes pushes Asian refiners to lean more heavily on non-Gulf barrels.
Freight rates on the route from the US Gulf Coast to Asia have been rising steadily this year alongside a broader surge in tanker costs tied to the conflict affecting the Strait of Hormuz, one of the world’s most important oil chokepoints. The disruption has already lifted Middle East to Asia freight sharply, and the same tightness in the very large crude carrier fleet has spilled over into the route used to move US barrels east.
Saudi Arabia added to the pressure on regional supply routes earlier this month when it shut its East-West pipeline, which links oil production in the Eastern Province to the export terminal at Yanbu on the Red Sea, after the line was struck in attacks originating from Iraq. The pipeline is one of the kingdom’s main alternatives for moving crude to export markets without relying on tankers transiting the Strait of Hormuz, and its closure has heightened concern among traders about how much spare capacity remains to route around the strait if disruption there persists.
Despite the higher shipping costs, Asian refiners are continuing to charter tankers to bring in US crude, seeking to cover supply that would otherwise have come from the Gulf. Market participants say that even with elevated freight, US grades such as West Texas Intermediate have so far remained competitive against alternative crude once landed in Asia, a margin that has underpinned a wave of chartering activity out of the US Gulf Coast in recent weeks.
That competitiveness is not guaranteed to hold. If freight rates keep climbing, the extra cost of shipping could eventually erode the price advantage that has made US barrels an attractive substitute, potentially slowing the flow of US cargoes to Asia and forcing refiners back toward whatever Gulf or alternative supply remains available. For now, traders say the priority for Asian buyers is securing barrels at almost any freight cost, given the uncertainty over how long the disruption to Gulf shipping routes will last.
This article was written by Eamonn Sheridan at investinglive.com.