Korean Refiners Turn To U.S. Crude As Freight Rates Surge

A Suezmax-class tanker loading crude at the Port of Corpus Christi in the Gulf of Mexico. (Photo courtesy of Port of Corpus Christi) Due to geopolitical instability and a vessel supply shortage, the domestic refining industry has begun securing U.S. crude oil. As maritime crude freight rates surge, companies are reducing the burden of crude transport costs by utilizing small oil tankers and long-term charter contracts. According to the industry and foreign media on Oct. 21, the charter rate for Very Large Crude Carriers (VLCC) transporting crude oil from the U.S. Gulf of Mexico to Asia reached $80 million. Converted to freight rate per barrel, it is about $40, which is about 5 times higher compared to the pre-war level of $8.6 per barrel. This is due to the surging freight rates for Very Large Crude Carriers (VLCC) as geopolitical risks in the Middle East and competition to secure vessels overlapped. It is known that SK Energy urgently chartered the Aframax-class (deadweight tonnage of 80,000-120,000 tons) oil tanker ‘Samos’ for $23 million to transport about 750,000 barrels of U.S. crude oil for delivery in early November. This is a strategy to respond to surging freight rates by utilizing vessels with smaller cargo capacities than VLCCs. Taiwan’s state-owned refiner CPC is also reported to have intensively secured 6 cargoes of the 600,000-barrel Aframax-class over a week, instead of the VLCCs it usually purchased at a level of 2 to 3 vessels per month. SK Energy is also maintaining the proportion of long-term charters among its total crude oil transport vessels at a level of 60-70%. This is interpreted as an effort to reduce the cost burden caused by freight rate fluctuations by lowering reliance on spot contracts, which secure vessels in the short-term market. GS Caltex secured a crude oil volume of about 2,000,000 barrels, equivalent to one VLCC, through the global energy company Chevron. This aims to maintain a stable procurement base through transactions with major oil companies in a situation where competition to secure vessels is intensifying. Movements to reduce the burden of transport costs in crude oil purchase contracts are also emerging. Instead of refiners directly securing vessels and bearing the freight costs, they are utilizing transactions under ‘Delivered basis’ conditions, where the seller is responsible for transport to the destination. The United Arab Emirates (UAE)'s Abu Dhabi National Oil Company (ADNOC) is reported to have recently sold crude oil volumes heading to India and China on a delivered basis. Saudi Arabia’s state-owned oil company Aramco is also easing the transport cost burden of Asian refiners by expanding this condition in crude oil transactions for delivery in November. It is known that Aramco also set the official selling price for crude oil bound for Asia in November at -$5, lowering it by $3 per barrel from the previous month. An industry official said, “The cost burden has increased due to rising freight rates,” and added, “We are taking action to defend costs by utilizing long-term charter contracts, diversifying procurement sources, and price reductions by oil-producing countries, but actual profitability may vary depending on various factors such as international oil prices, refining margins, crude oil import prices, and transport costs.”