Oil Shipping Costs Surges Amidst Ukraine War Crisis

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Credit: Garry2014 / Shutterstock
  • A surge in the cost of shipping oil between the world’s ports is buoying energy prices.
  • Economic fallout from the war in Ukraine has severed many of the short oil- and petroleum-product trading routes.
  • Many shipments now spend five times longer in transit to refineries or wholesalers than they would have before the conflict.

Average tankers have earned more than $40,000 a day for four months, their longest such stretch in 15 years, according to London-based shipbroker Clarksons. The spot price for modernized ships known as very large crude carriers, which can stretch more than three football fields in length and carry two million barrels of oil, surpassed $115,100 a day on Nov. 18. 

Price Conundrum

The price increases come at a key moment for oil markets, with the Organization of the Petroleum Exporting Countries and their Russia-led allies set to meet Dec. 4 amid flagging global demand and tensions with the U.S. The soaring cost of transporting oil, which comes as ships carrying liquefied natural gas also fetch high prices. “The world’s oil-supply maps are being completely redrawn,” said Christian Ingerslev, chief executive of Copenhagen-based shipping operator Maersk Tankers A/S.

Tankers departing from Primorsk, Russia, which is near St. Petersburg, can reach the Dutch port of Rotterdam in roughly four days but many Russian shipments have rerouted on a roughly 26-day trip around the continent, across the Mediterranean Sea, and through the Suez Canal for delivery on the western coast of India. To replace those Russian barrels, European buyers are also turning to more distant producers including the Middle East, South America and the U.S. 

Elevated shipping rates have added a few dollars to the cost of each barrel of crude, depending on the distance they travel, analysts say. The impact of Europe’s cutoff from Russian energy exports hasn’t fully borne out for refined products such as diesel, which is key for agriculture, trucking and manufacturing. The cost of transporting such fuels across the Atlantic Ocean has already tripled to about $5 per barrel in 2022, Goldman Sachs analysts wrote in a note last month.

Altered Routes, Fewer Opportunities

“That’s where the real tightness is,” said Natasha Kaneva, head of global commodities strategy at J.P. Morgan. While Russia appears to have access to enough oil tankers to transport its crude, she added, it faces a shortage of ships equipped for carrying petroleum products.  Tanker operators “appreciate years like this one when they’re making money hand over fist,” said Omar Nokta, a shipping analyst at Jefferies. Mr. Nokta said the altered routes mean tankers have fewer opportunities to load cargo while facing new logistical snafus, compounding the shortage of available ships. 

Shipyards are backlogged with container ship orders, Ardmore Shipping Corp. Chief Executive Anthony Gurnee said, meaning new tankers wouldn’t arrive for a few years, raising the risk they would be technologically dated. Mr. Gurnee said Ardmore’s 10-person charter team increasingly works like traders, plotting out the best combination of routes for a 30-ship fleet of product and chemical tankers. 

With so much volatility in the market, he said, “there doesn’t appear to be any practical upper limit on how high our rates can go.”

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Source: WSJ

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