Rising freight rates undermine benefits of crude price cuts for Asia

Singapore — Middle East producers looking to win the market share battle with attractive price cuts in Asia may have little to cheer this month, as surging freight rates offset the impact of cost savings to refiners.

"Freight has [more than] doubled over the last week," lamented a refiner based in Southeast Asia, adding that procuring vessels to carry crude from the Persian Gulf was now becoming a challenge.

Freight rates for VLCCs in the East of Suez shot up last week after Saudi Arabian shipping company Bahri chartered more than a dozen VLCCs from the spot market with the country planning to step up crude output by 3 million b/d from April.

Bahri's move cascaded over into the wider VLCC market, with rates up at w228 Tuesday on the Persian Gulf-China route, Platts data showed. The route was assessed up on the week from w55.5 last week.

Shipping crude from West Africa to Asia was costing buyers around $10/b as of Tuesday, and $6/b from the Persian Gulf to Asia, according to a refiner based in the region.

Further correction

Crude market participants had initially anticipated sharp price cuts from Middle East producers, the likes of Saudi Aramco, to boost spot market differentials for May cargoes amid multi-year lows for crude oil markets globally.

But rising freight costs on VLCCs are likely to put pressure on spot prices for crude barrels, as total procurement costs rise for buyers. The upward movement in freight may see buyers shun Middle East crude in favor of closer, and cheaper crude, thus pushing down demand and spot price differentials of Middle East crude.

"The Saudi Russia [price war] situation is quite the conundrum, because how far down can they keep cutting the price? Netbacks came off, but will they come off further next month?," asked a crude trader based in Singapore.

Already, buyers coming back online in China after a coronavirus-led demand slowdown were inquiring for Russian ESPO crude, sending premiums of the grade up $1.20/b within a week, said market participants.

ESPO, a medium sour crude blend which is shipped from the far-eastern Russian port of Kozmino, takes around six days to travel to North Asian ports in China, Korea and Japan. Middle East crude, by comparison, is a six-week voyage from the Persian Gulf.

Freight for ESPO was being quoted at around $1.30/b Wednesday in the crude market, up from a typical range in the market of around 80 cents/b to $1/b.

"Kozmino to North China is at around $900,000" freight for a cargo of ESPO, according to an ESPO trader. "Usually it is $700,000 – market bottom for that route is $640,000."

Price war conundrum

Earlier this month, Saudi Aramco cut pricing of its crude exports for April, including the biggest cut ever for Arab Light crude for Asia, after OPEC and key ally Russia failed to agree to a production cut, pushing global oil prices to their worst day in more than five years on Friday.

Other Middle East producers followed suit, with Iraq's SOMO, UAE's ADNOC, Kuwait Petroleum and Qatar Petroleum issuing price cuts of similar magnitude to Asian buyers.

The move triggered a 30% correction in global oil prices as markets assessed the risks of a Saudi-Russia price war. The breakdown in OPEC+ negotiations saw Aramco and other Middle East producers project increases in monthly production numbers, a move that is likely to add further downside pressure in a time when oil demand is at multi-year lows.

Aramco said it aims to pump 12.3 million b/d of crude, 27% above current output, while UAE's ADNOC, which currently pumps around 3 million b/d, announced plans to supply over 4 million b/d to markets in April and speed up capacity expansion.