Asian Refiners Shift Tanker Strategies as Crude Freight Costs Surge

Asian refiners are changing how they move and buy crude as tanker costs climb and vessels become harder to secure. Their response includes booking more Aframax tankers, relying on longer charter agreements and buying some cargoes on a delivered basis, with the seller arranging transport. These choices can change the economics of a crude purchase before the oil reaches a refinery.

The squeeze centers on the Strait of Hormuz, where roughly 80 very large crude carriers (VLCCs) are being used in shuttle services, according to Kieran Gallagher, Asia President of Vitol. More Middle Eastern exports in September and increased ship-to-ship transfers in the strait have added to congestion. With vessels spending extended periods in the region, fewer are available for other international routes.

Freight for crude moving from the United States to Asia has reportedly reached as much as $40 per barrel. Higher risk premiums for vessels operating in the Middle East have added to transport expenses. For buyers, the combined effect is a greater delivered cost and less certainty about whether a distant crude grade will remain economical after freight and insurance are included.

Smaller tankers gain ground

Aframax vessels can carry around 600,000 barrels, compared with about 2 million barrels for a VLCC. VLCCs generally spread their voyage costs across more oil, but the current freight market has brought the per-barrel costs of the two vessel classes closer together. That narrows the usual scale advantage and gives refiners more reason to consider smaller cargoes.

Taiwan’s CPC, which typically buys two or three VLCC cargoes a month, purchased six Aframax cargoes last week. South Korean refiner SK Energy chartered the Aframax tanker Samos for $23 million to load U.S. crude at the beginning of November. The examples show how buyers are adjusting vessel choices in response to available capacity and voyage costs.

Smaller shipments can offer flexibility when a full VLCC cargo is difficult or expensive to arrange. They also require refiners to assess the cost of moving several loads against the price and availability of a larger vessel. The current convergence in per-barrel freight costs makes that comparison less straightforward than it would be when VLCC rates provide a clear cost advantage.

Charters and delivered cargoes

Refiners are also looking beyond the spot market, where prices can rise sharply when available tankers are scarce. K.Y. Lin, president of Formosa Petrochemical, said bringing crude from the United States and Africa to Asia has become economically challenging because of transport costs. Lin said few companies apart from Middle Eastern producers are renting tankers from the spot market, while Asian buyers are benefiting from long-term charters that help reduce costs.

A longer charter gives a buyer access to vessel capacity under an agreed arrangement, reducing its exposure to immediate spot-market conditions. It does not remove freight from the cost of crude, but it can make the transport plan more predictable. Buyers still have to weigh charter commitments against changing cargo needs and the routes they expect to serve.

Some refiners are also choosing contracts in which crude is sold for delivery at its destination. Under that structure, the seller organizes the sea transport and pays the freight directly, while those costs may be reflected in the total price paid for the oil. Abu Dhabi National Oil Company has sold some crude cargoes to buyers in China and India on this basis for loading within the next two months. Saudi Aramco has used a similar arrangement for some Asian deliveries scheduled for next month.

For a refinery, delivered pricing can shift the task of arranging a tanker to the seller. The buyer still needs to compare the full purchase price with alternatives, since the freight expense may be built into the sale price. The arrangement changes who organizes the voyage; it does not make the cost of moving the cargo disappear.

Freight reshapes crude price spreads

Higher transport costs are affecting which crude grades remain attractive across regions. Reduced buying of oil from distant sources by Asian and European refiners has weakened demand for U.S. and West African crude. London-based oil traders have assessed that differentials for some West African grades fell as low as minus $20 per barrel to offset elevated freight costs.

European refiners’ move toward nearby supply has supported demand for North Sea crude. The Dated Brent benchmark’s premiums exceeded $20 per barrel last week, reaching record levels. These shifts show how freight can widen price differences between grades and regions: a lower-priced cargo from farther away may lose its appeal once shipping costs are added, while nearby supply can command a larger premium.

Margins remain under pressure

Higher freight and insurance costs are consuming part of refiners’ gross margins, but production is continuing. Lin said Formosa Petrochemical must keep operating because of existing contractual obligations, even as transport expenses take a significant share of its gross margin. After freight and insurance for Middle Eastern crude are counted, net refinery margins are still reported above $10 per barrel.

Morgan Stanley analysts assessed that crude demand has held up despite higher transport costs, citing strong refinery margins and low oil inventories. That resilience helps explain why refiners continue to secure cargoes even as they adjust vessel size, charter duration and purchase terms.

The practical signal for crude buyers is that freight has become a direct factor in sourcing decisions and contract structure. Refiners will need to compare vessel availability, the delivered cost of each grade and the terms attached to each cargo as the tanker market remains tight.

Source: SeaNews Türkiye