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Surging Tanker Rates Make U.S Oil Too Expensive for Asia

The tense situation in the Middle East with constant Houthi attacks on commercial vessels in the Red Sea is upending the global trade of crude oil and petroleum products—again.  
The markets had just adjusted to the disruption caused by the sanctions on Russian oil and fuels, which found new outlets in Asia, North Africa, and South America instead of the top buyer before the Russian invasion of Ukraine.  
New Threat To Global Oil Trade
Then came the Hamas-Israel war that began in early October, shifting the market focus to the most vital oil shipping lanes in the world, in the Middle East.
Oil Prices Surge Following Oil Tanker Hijacking in Gulf of Oman
The most recent threat to global trade, including part of oil and products trade, emerged from the Iran-aligned Houthis in Yemen, who have intensified attacks on commercial vessels in the Red Sea and near its vital chokepoint, the Bab el-Mandeb Strait.   
The Bab el-Mandeb Strait is a critical chokepoint for international oil and natural gas flows. The Suez Canal, the SUMED pipeline, and the Strait are strategic routes for Gulf oil and natural gas shipments to Europe and North America and for U.S. oil to Asia. Total oil shipments via these routes accounted for 12% of total seaborne-traded oil in the first half of 2023, and liquefied natural gas (LNG) shipments accounted for about 8% of worldwide LNG trade, the U.S. Energy Information Administration (EIA) says.
As a result of intensified Houthi attacks in the Red Sea—the route that links the Middle East and the Gulf of Aden with the Indian Ocean and Asian markets—shippers and oil majors such as BP either rerouted part of their tankers and container vessels or temporarily suspended all shipments via the Red Sea/Suez Canal route.  
Last week, shipping giant A.P. Moller–Maersk said, “While we continue to hope for a sustainable resolution in the near-future and do all we can to contribute towards it, we do encourage customers to prepare for complications in the area to persist and for there to be significant disruption to the global network.”
For the time being, oil and gas supply per se isn’t in jeopardy, and there is capacity to reroute to alternatives, but this will come at a cost, analysts say.  
U.S. Oil Becomes Too Expensive for Asian Buyers
These higher costs have already upended global crude trade patterns. U.S. crude such as WTI Midland, is now more expensive for Asian refiners compared to the crude grades from the Middle Eastern producers as tanker rates have surged in recent weeks. The arbitrage window for WTI cargoes to Asia is now closed, traders say. Asian buyers are boosting purchases and orders for Middle Eastern crudes at the expense of U.S. crude.
The cost to charter a supertanker to ship up to 2 million barrels of crude from the United States to Asia surged this week to about $10 million, up from around $8 million just last week, per data from shipbroker Simpson Spence & Young on LSEG Eikon cited by Reuters.
The premium for WTI for April delivery on a cost-and-freight basis has now jumped to more than $4 per barrel over the Dubai benchmarks, compared to a $2 a barrel premium last week, traders told Reuters.  
Due to the higher freight costs, WTI Crude is now $1 a barrel more expensive than Abu Dhabi’s Murban, versus small discounts or parity in prices last week, the traders say.
“No deal (for WTI) is heard settling at the new prices. The arbitrage window is now closed,” an oil trader based in Singapore told Reuters.
According to Energy Aspects analysts Anastasia Zania and Christopher Haines, “The pop in freight will now favor Middle Eastern grades.”
“The stronger rise in US Gulf Coast freight has already driven Japanese and Indian refiners to pick up Murban, possibly at the expense of WTI,” the analysts wrote in a note carried by Bloomberg.
U.S. crude can’t compete now in Asia because freight rates have made it too expensive.
So Asian buyers are turning to more Middle Eastern crude, especially after Saudi Arabia—the world’s top crude oil exporter—slashed the price of its crude for Asia for February loading by $2 per barrel to a premium of $1.50 per barrel over the Oman/Dubai prices, off which Middle Eastern producers price their crude loading for Asia. That’s the lowest premium for Saudi crude over Oman/Dubai for 27 months—since November 2021.  
For example, India is looking to buy more term supplies from Saudi Arabia and from West African producers as the world’s third-largest crude oil importer is always on the hunt for bargains for its crude supply.
With prohibitively expensive U.S. crude and lower imports of oil from Russia, now India’s top crude supplier, the Asian country is turning to more Middle East supply. State refiners Indian Oil Corporation (IOL) and Bharat Petroleum Corporation Limited (BPCL) are looking to book extra 1 million barrels of oil each from Saudi Arabia’s oil giant Aramco for February, sources at the Indian companies have told Reuters.
Rising tensions in the Middle East and the Red Sea/Suez Canal route are likely to favor more U.S. crude supply to Europe and more Middle Eastern supply to Asia in another shift to global oil trade caused by geopolitical flare-ups.
By Tsvetana Paraskova for Oilprice.com
Jan 13, 2024 13:53
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