Oil producers cut prices amid record shipping costs
Oil producers are reducing prices to counter record-high shipping costs that are altering global trade patterns. Freight rates have escalated since the Ukraine conflict began, causing delivered prices to exceed what refiners can reasonably accept. In the Middle East, where the strain is most severe, Very Large Crude Carrier (VLCC) rates from the Gulf to China rose from about $4 per barrel to $33 per barrel by late September. This surge has driven landed costs in China to nearly $140 per barrel—well beyond what refiners can absorb profitably.
The increase began in March, when rates jumped to $17 per barrel before settling around $11–$12 per barrel through July. A second surge occurred in August after the US-Iran ceasefire ended, sending freight costs climbing again. For Japan and South Korea, landed costs reached approximately $145 per barrel, forcing producers to cut differentials or seek buyers closer to home.
Alternative loading points have provided only partial relief. Saudi Arabia’s Yanbu terminal initially saw freight rates within a $6–$7 per barrel range, but Houthi attacks on Red Sea shipping lanes pushed costs to $28 per barrel by mid-October. Consequently, Saudi Aramco has cut exports from Yanbu to 1.6–1.8 million barrels per day—half the March–July average—with most cargoes now moving through the Gulf instead.
Producers slash prices to offset freight spikes
Aramco is partially offsetting freight burdens by offering Arab Light at a $5 per barrel discount to Oman/Dubai prices. Even with this adjustment, landed costs in China remain above $130 per barrel. Few Asian refiners are willing to charter vessels to load in the Gulf, leaving Aramco to sell spot barrels at Dubai plus $5 per barrel, a price still too steep for Chinese buyers awaiting shipping cost relief.
The current approach involves securing buyers for future deliveries while leaving final pricing subject to freight fluctuations. If shipping rates decline, the same differential could become profitable. However, if costs persist, producers face selling at a loss. Some are reducing exposure by using tankers from Bahri, Saudi Arabia’s national shipping company, where Aramco holds a 20% stake. Although freight must be charged at market rates, shipping earnings help balance crude sales pressures.
By September, the freight crisis had spread beyond the Middle East. Brazil-China VLCC rates reached $36 per barrel by mid-October, pushing landed costs for Tupi crude to around $140 per barrel. Despite FOB netbacks showing single-digit discounts to ICE Brent, Chinese refiners now prefer delivered prices near $130 per barrel. As a result, Brazilian exports to China have slowed, with India emerging as a more attractive alternative.
West Africa and Brazil redirect cargoes to India
West African producers are experiencing similar challenges. Djeno crude trades at a $10 per barrel discount to ICE Brent, but freight from West Africa to China costs $34 per barrel, $9 per barrel more than shipping to India. This has redirected cargoes previously bound for China toward Indian refiners. India’s imports from Angola, for instance, are expected to rise from 35,000 barrels per day in September to 315,000 barrels per day in October, with additional volumes from Gabon and Congo en route.
These trade shifts reveal a critical issue: deeper crude discounts no longer guarantee competitive delivered prices. Producers pricing against Dated Brent, reflecting the North Sea’s tight market, are cutting FOB differentials to account for higher shipping costs. Yet the same grades now trade at double-digit premia against other benchmarks. Russia’s Urals crude, for example, has shifted from an $8 per barrel premium to Dated Brent to trading flat against it, with further declines anticipated.
War risks and delays add hidden shipping costs
Freight comparisons fail to capture the full cost of purchasing crude in today’s disrupted markets. Loading delays in the Gulf have become common, exacerbated by Iranian drone strikes. Demurrage rates for delayed cargoes have surged to $1 million per day, adding roughly $0.50 per barrel for each day a VLCC remains idle. War-risk premiums now cover 78% of hull and machinery value, totaling about $910 million, equivalent to $45 per barrel for an average VLCC.
Canada’s TMX pipeline exports, delivered on Aframax tankers due to shallow waters at Westridge, have seen freight rates spike to $30 per barrel this week. This increase eliminates the cost advantage of smaller vessels, making all tanker sizes equally expensive. Meanwhile, Russia’s ESPO crude, a key supply for Chinese refiners, has seen state-owned buyers secure all November-loading cargoes by early September, an early commitment in an otherwise volatile market. This shift reflects refiners’ preference for predictable, short-haul supplies over long-haul risks. For now, the most stable barrels are those arriving without freight surprises or geopolitical delays.
