The surge in shipping costs, now reaching $40 per barrel, is making American heavy crude increasingly unviable for refiners in Asia and Europe. This significant rise in expenses is exacerbating an already strained global diesel market.
Due to a shortage of tankers, heavy crude is struggling to reach markets with strong demand, ensuring that the global diesel shortage will continue.
The ongoing crisis in the Middle East has driven tanker rates to unprecedented highs, creating a significant vessel shortage. This logistical issue is leading to an oversupply of heavy crude in North and South America, while Asia and Europe face a scarcity of heavy grades. Canada is producing more than 5 million barrels of crude oil daily, the majority being heavy crude. Of that, approximately 4 million barrels are transported to U.S. refineries. Venezuelan production has also increased following the U.S. interference in the country’s oil sector. However, a considerable portion of this heavy crude is stranded domestically due to soaring freight costs, leading to price pressures on crude from Canada, Colombia, and Ecuador. Venezuelan crude primarily heads to the U.S. Gulf Coast, reducing its vulnerability to freight cost fluctuations.
Recent data from Argus indicates that the prices for Canadian, Colombian, and Ecuadorian heavy crude have fallen by around $10 per barrel in recent weeks. Now, flagship grades are trading at their lowest point in the past six weeks, with Western Canadian Select dipping to $74 per barrel before rebounding to $79.50 at the time of this writing.
Ecuador’s premier heavy crude grade, Oriente, has shown signs of recovery, rising from last week’s low of $76 per barrel to over $84. Colombia’s Vasconia was the most expensive among the three at $84 per barrel last week and is likely to have increased further in response to recent tanker attacks in the Strait of Hormuz.
While the aforementioned prices seem attractive compared to Russian Urals priced near $120 per barrel and Iran Light at $104 per barrel despite the U.S. Navy blockade, they do not account for freight and insurance costs, which have now reached $40 per barrel. This is particularly concerning given that heavy crude is in high demand due to the global diesel shortage. Heavy crude is preferred for its higher diesel yield than lighter grades, making its availability critical at this time.
“You need a ship, and both the availability and price of ships are increasing,” stated TP ICAP analyst Scott Shelton to Reuters. This year, global tanker rates have skyrocketed as Middle Eastern producers resort to ship-to-ship transfers outside the Strait of Hormuz. They use shuttle tankers, including smaller vessels, to transport oil through Hormuz and then re-load it onto larger supertankers in the Gulf of Oman. Consequently, supertanker rates from the Gulf to Asia reached as much as $1.4 million per day earlier this month.
Shipping costs along the route from the U.S. Gulf Coast to Europe have ballooned to $46 million in total, approximately $24.50 per barrel of crude, compared to $6.5 million or about $4 per barrel prior to the war. The expenses for shipping from the Americas to Asia have exceeded $80 million, or $40 per barrel. Given these expenses, it’s understandable that refiners in Europe and Asia are hesitant to make purchases.
This confluence of factors signifies that the diesel shortage is unlikely to resolve swiftly. With heavy crude barrels trapped in the Americas due to high freight costs and limited alternative suppliers at a comparable scale to Canada, this market imbalance is expected to persist. As long as numerous vessels remain engaged in ship-to-ship transfers, it is unlikely that freight costs will significantly decrease, hampering the demand for heavy crude across the Atlantic.
