(Bloomberg) —
The costs of shipping oil have become so high that it's now more expensive to hire a tanker from the US to China than to send a rocket into space. Shipping that oil now costs around $80 million, while a standard launch of a SpaceX Falcon 9 is about $74 million, according to shipbroker Gibson. Earlier this year, the same amount could have bought a new tanker outright.
These soaring prices stem from a global shortage of tankers, which is worsening with every additional barrel of oil passing through the Strait of Hormuz. The supertanker market is experiencing a boom that veterans say is unlike anything they have seen before. Even when adjusted for inflation, current shipping rates are at their highest since the first supertankers entered service in the 1960s. They have surpassed the tanker wars of the 1980s, when Iran and Iraq attacked commercial vessels in the Persian Gulf.
“There’s really not quite enough shipping to go around,” said Russell Hardy, CEO of Vitol Group, the biggest independent oil trader globally, during a conference this week. “We’ve had pretty parabolic pricing.”
This rise in shipping costs is adding complications to an oil market that has been dealing with disruptions from the Iran war. Higher costs are making crude more expensive for buyers, shrinking refining margins and contributing to inflation in energy markets.
The core issue is simple: there are not enough tankers to transport all the oil that needs to be shipped. Middle Eastern producers are increasingly depending on transferring oil from Hormuz to other vessels, as the Iran conflict changes trade routes in the region. These transfers can extend each journey by about a week, further stressing the global fleet. As shipments through Hormuz recover to roughly 80% of pre-war levels, this issue has intensified.
The inconsistent trade flows have exacerbated the shortage. During the collapse of traffic through Hormuz, tankers roamed empty for weeks, looking for work elsewhere. Now, with Gulf shipments recovering, vessels need to reposition themselves, which can take weeks. The ongoing limits on Iranian exports to China have added to this strain, forcing Chinese buyers to seek more crude from other sources, further increasing tanker demand.
Iranian attacks have also sidelined some ships for repairs, further tightening capacity. Some vessels are taking lengthy detours around Africa to steer clear of Houthi attacks.
“We’ve seen strong freight markets before, but the speed and scale of this surge is remarkable,” said Lauren Gallinari, head of business intelligence at shipbroker MJLF & Associates.
Freight Squeeze
What used to be a minor cost in the shipping supply chain has now ballooned relative to overall crude prices. This week, a booking from the US was made at a rate that equates to a transport cost of $41 per barrel, compared to an average of just $4.50 for the same route last year. That’s around 45% of the price of West Texas Intermediate futures, which traded near $91 per barrel on Friday.
For tanker owners, these skyrocketing freight costs are proving profitable. This market surge is generating significant profits for a select group of often anonymous shipowners, including a prominent South Korean tycoon and several Greek and Norwegian families. As rates recently reached new highs, many in the tanker market believe the rally may continue. Those betting against the trend have largely been wrong so far.
“With little additional capacity available, freight increasingly depends on what charterers are willing to pay,” analysts from Clarksons Securities noted.
The volatility has reached such extremes that traders struggle to predict shipping costs within just a few dollars per barrel, Hardy noted.
The industry is already pivoting. Cargoes that would typically be shipped on a supertanker from West Africa and South America are now being divided between two smaller Suezmax ships. Additionally, oil producers are looking to buy tankers or arrange long-term hires to shield against price fluctuations. Middle Eastern countries such as Iraq, the UAE, and Kuwait have been in the market for tankers in recent weeks.
These workarounds are spreading the squeeze further. Daily earnings for Suezmax vessels have surged to over $680,000, about five times what they were at the beginning of the month. Rates for ships transporting gases like propane have also soared, more than tripling since last year.
The cost of buying a tanker is also rising sharply. The value of a new oil tanker in the second-hand market has reached $240 million, the highest ever recorded, and more than 60% higher than at the end of last year.
For oil producers, climbing freight costs are changing the economics of where they can competitively sell their crude. In West Africa, where exporters primarily serve refiners about 10,000 miles away in China, crude values are dropping as sellers offer discounts to offset rising shipping costs.
In its trading update this week, Shell Plc said that some of its third-quarter results would reflect the impact of “an increase in variable components of long-term shipping leases in the current macro environment.” They had made a similar statement earlier in the year. At the same time, the value of the world’s largest public shipping companies has surged to a new record above $70 billion.
The central question now is how much longer this rally can continue before it makes buying crude, shipping it globally, and turning it into fuels no longer viable.
Currently, a diesel shortage is boosting refining margins, but rising freight costs are starting to erode that advantage. Although European refiner Repsol reported margins of $36 a barrel in the third quarter, RBC analysts say those numbers fell to around $15 in October due in part to high tanker costs. If freight rates continue to rise, refiners may need to reduce the amount of crude they process.
“The market is getting stronger,” said Tor Svelland, founder of hedge fund Svelland Capital, who began as a freight trader. “At some point, refiners may need to pause. When shipping costs rise from 5% to 50% of the cargo value, trade flows will stop.”