Yves here. An example of how Iran’s campaign in the Strait of Hormuz is having effects well out of theater. The world is particularly short of heavy crude, which among other things is an input in the production of diesel fuel. Insanely high tanker rates are producing balkanization of the oil market, with it not being economical all in to transport heavy crude of of the Americas.
By Irina Slav, who has been writing about global energy markets since 2007, covering the oil and gas industry, energy security, commodities, and the forces reshaping the modern energy landscape. Originally published at OilPrice
- Record tanker rates are creating a heavy crude glut in the Americas, pushing Canadian, Colombian, and Ecuadorian crude prices down roughly $10 per barrel.
-
Shipping costs have surged to $40 per barrel, making American heavy crude increasingly uneconomical for Asian and European refiners.
-
The global diesel crunch is set to persist, as tanker shortages prevent heavy crude from reaching markets where demand remains strong.
The Middle East crisis has driven tanker rates to all-time highs and created a shortage of vessels. This oil logistics problem is now causing a ripple effect, tipping the heavy crude market in North and South America into oversupply—while Asia and Europe grapple with a shortage of heavy grades.Canada is producing over 5 million barrels of crude daily, most of it heavy crude. Some 4 million barrels daily of that goes south to U.S. refineries. Venezuelan production has also moved higher after the U.S. disposed of the country’s government and took control of the oil industry. According to Reuters, a lot of this heavy crude is stuck at home because of the record freight costs that have dampened appetite, pressuring prices in Canada, Colombia, and Ecuador. Venezuelan crude goes mostly to the U.S. Gulf Coast, so it is not as vulnerable to freight rate developments.Prices for Canadian, Colombia, and Ecuadorian heavy crude have all shed some $10 per barrel in recent weeks, the report said, citing Argus data. All the flagship grades are now trading at the lowest in six weeks, with Western Canadian Select reaching $74 per barrel last week, before rebounding to $79.50 at the time of writing.
Ecuador’s flagship heavy crude grade, Oriente, has also recovered, after dropping to $76 per barrel last week, now trading at over 84 per barrel. Colombia’s Vasconia was the most expensive of the three last week, trading at $84 per barrel, and it has also probably gone up this week, as all oil gains on the flurry of tanker attacks in the Strait of Hormuz.
These prices cited above seem quite enticing on a market where Russian Urals fetches close to $120 per barrel, and Iran Light sells for $104 per barrel, despite the U.S. Navy blockade. However, these prices exclude freight costs and insurance, and these have reached up to $40 per barrel of crude, at a time when heavy crude is in especially strong demand because of the global diesel crunch. Heavy crude yields more diesel than lighter grades, which is quite a hot topic right now.
“You need a ship and the price of ships are going up, and the availability ships are going down,” TP ICAP analyst Scott Shelton told Reuters. Global tanker rates have soared this year due to Middle Eastern producers taking to ship-to-ship transfers outside the Strait of Hormuz. For this, they use shuttle tankers, including smaller carriers, to sneak the oil through Hormuz and then load it on supertankers in the Gulf of Oman. As a result, supertanker rates from the Gulf to Asia hit $1.4 million daily earlier this month.
Shipping costs on the route from the U.S. Gulf Coast to Europe, meanwhile, have surged to $46 million in total, equal to $24.50 per barrel of crude. That compares to $6.5 million, or some $4 per barrel, before the war. The price is even higher on the route from the Americas to Asia, at over $80 million or $40 per barrel. It is little wonder why refiners in Europe and Asia are balking at the price and staying away from purchases.
This combination of factors suggests that the diesel crunch is not about to go away anytime soon. With heavy crude barrels stuck in the Americas because of freight costs, and few alternative suppliers of the same scale as Canada, for example, the market imbalance appears set to stay for a while. As long as there are so many vessels tied up in ship-to-ship transfers, freight costs are unlikely to move down meaningfully enough to stimulate cross-Atlantic demand for more heavy crude.