At the Energy Intelligence Forum in London on Tuesday, Russell Hardy, the chief executive of Vitol, described an oil market in which benchmark prices and physical supplies were sending sharply different signals. Brent futures peaked close to US$110 a barrel this week, while European Dated Brent, the physical crude price, rose above US$131 as buyers searched for cargoes closer to home.
Hardy, whose company Vitol is the world’s largest independent oil trader, said the regional conflict had changed the nature of the energy crisis. “We started this conflict with a crude crisis. Then it turned into a product crisis. Now we have more crude oil coming out of the Middle East, but it is turning into a shipping crisis.”
The US Navy has opened a convoy route through the Strait of Hormuz. Hardy estimated that approximately 12M bbl/day of crude and 2M bbl/day of refined fuels were leaving the Persian Gulf under the arrangement.
Yet the convoy system has left tankers waiting several days or weeks for cargoes, Hardy said. He called the method “very inefficient”, because vessels are held up rather than making voyages.
That delay has made tanker capacity a scarce and highly valuable part of the oil trade. Hardy said charter prices had become “pretty parabolic”.
A cargo from Houston to Asia now carries an additional cost of about US$26 a barrel, or US$52 million a cargo, for supplies headed to the world’s largest crude-importing region. The charge is roughly a quarter of the price of West Texas Intermediate futures. Before the war, shipping was usually only a tiny part of the cost.
On the main route from the Persian Gulf to China, very large crude carriers carrying 2 million barrels of crude are earning upward of US$1.2 million a day.
The gains have also lifted tanker-company valuations. The value of the world’s largest oil tanker equities reached a record of almost US$70 billion this week, as speculators and operators anticipated high shipping rates.
For refiners and buyers, the same freight market is narrowing the range of affordable supplies. One oil executive at the London conference said North Sea cargoes had sold for $145/bbl last week.
European refiners have recently seen their refining margins turn negative, squeezed by the cost of obtaining crude and unable to pass shipping surcharges on to customers.
Ship-tracking data from Vortexa show that US-Asia flows have fallen in recent weeks as freight costs roughly tripled. A Japanese refiner recently bought Alaskan crude, a grade that is not usually well suited to the country’s processors, because the voyage was relatively short.
Saad Rahim, chief economist at Trafigura Group, captured the scale of the move at the Bloomberg Commodity Investor Forum on Thursday (17 September). “It has never been this expensive to move oil around.”
Hardy said the Navy convoy remained crucial to preventing a more severe price shock. Without it, he said, “you do have that $200/bbl scenario”.
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