The arbitrage for spot crude shipments from the U.S. Gulf Coast to East Asia, an increasingly popular feedstock source for Asian refiners, has closed following the sharp increase in freight rates in the face of sanctions against six Chinese shipping companies, market sources said.
“Very large crude carrier (VLCC) freight was around $5.5 million before the Cosco sanctions, now it’s about $9-9.5 million,” said one source. “It basically means cost went up by $2/bbl overnight.”
Rates went through the roof after the U.S. government imposed the sanctions on these shippers for transporting Iranian oil, triggering a scramble among charterers to find replacement vessels on key crude oil routes as many of the tankers affected were the larger VLCC and Suezmax class vessels.
“A lot of replacements were done by Unipec and other Chinese charterers after the sanctions on Cosco were put in place” said on ship broker.
The U.S. government last week banned dealings with six Chinese shipping companies: China Concord Petroleum Co., Pegasus 88 Ltd., Kunlun Shipping Co., Kunlun Holding Co. and two subsidiaries of Cosco, China's largest shipping company, Cosco Shipping Tanker (Dalian) and Cosco Shipping Tanker (Dalian) Seaman and Management.
At least 21 oil tankers, including eight VLCCs, are operated by shipping companies affected by the sanctions, according to data from IHS Markit Maritime Intelligence Network (MINT).
Crude traders said Asian refiners have this week moved to maximize purchases of regional grades as well as spot Middle East barrels including the light sour Murban crude, which is of similar quality to some of the grades shipped out of the U.S. Gulf Coast.
Premiums for November loading Murban rose to $0.80/bbl above its Official Selling Price (OSP) from plus $0.40/bbl and is expected to increase further, traders said.
There are expectations that the OSP, which will be released in the coming days, will also be higher, which could curb the soaring premium, they said.
Another sign of the strength in Middle East crude was the steep backwardation in the benchmark Dubai market with the front-month to the third-month spread at about $2.45/bbl, broker data show.
Crude oil from the U.S. has in recent months become a mainstay for Asian refiners even after China slapped a 5% tariff on U.S. crudes as buyers in the region swapped sources with their Chinese counterparts.
According to data from IHS Markit’s Commodities At Sea (CAS), a total of 53.7 million barrels are currently on board 32 vessels bound for Asia, including the Indian sub-continent. The majority of the crude, 25.7 million barrels, is destined for South Korea, which emerged as the biggest Asian buyer of U.S. crudes after Beijing imposed a 5% tariff effective Sept. 1.
Over the past year, U.S. shipments to Asia were at the lower in February, March and September, averaging about 23 million barrels, due to the trade spat between Washington and Beijing and as the industry adjusted to the new reality, especially after the 5% tax was imposed.
Shipments will jump to 36.5 million barrels for delivery in October and reached a peak of 45 million barrels in August, data from CAS showed.
Traders said going forward a hiccup similar to that seen during the low months is likely for deliveries in December and January as buyers take to the sidelines waiting for the spot arbitrage to re-open as the shipping market adjust to the reduced pool of available dirty tankers.
Some of the sanctioned vessels may exclusively ply routes faraway from the U.S., which could allow the shipowners to put the tankers back into use, they said.
-- Raj Rajendran, (Rajendran.Ramasamy@ihsmarkit.com)
Copyright, Oil Price Information Service
