ANALYSIS-Energy traders, shippers grapple with Red Sea fallout

Credit: REUTERS/HOUTHI MILITARY MEDIA

By Florence Tan, Mohi Narayan and Ron Bousso

SINGAPORE/NEW DELHI/LONDON, Jan 31 (Reuters) - To avoid the Red Sea, the supertanker Grand Bonanza set out early this month on a roughly 40-day journey carrying 1.8 million barrels of Abu Dhabi crude for TotalEnergies from the United Arab Emirates all the way around Africa to France.

The trip will take at least two weeks longer than the normal route via the Suez Canal, and at about $5.7 million, will cost nearly 80% more, according to estimates by a shipping source and data from LSEG and Kpler.

A strike last Friday on a Trafigura-chartered fuel tanker underscored the risk.

Energy producers and traders are weighing the higher prices of longer voyages around the Cape of Good Hope and using larger crude tankers to manage costs and risks, while buyers are demanding discounts to compensate for higher freight and war risk premiums.

Shippers are revising routes and refuelling points and accelerating cruising speeds, which burns more fuel and increases emissions.

European refiners are hurt by the increased shipping times that are driving up costs for their crude, but their margins are supported by a drop in competing product imports from the Middle East and India, traders said.

U.S. refiners benefit as they can send fuel products to Europe to replace supply from the Middle East, said Mukesh Sahdev, head of oil trading at consultancy Rystad Energy, just as the U.S. did with natural gas, replacing Russian supply after Moscow's invasion of Ukraine.

"The recent Red Sea attacks pose both a threat to EU refined products imports and an opportunity for the U.S. refining system to again fill the gap," he said.

For European refiners buying Iraq's Basrah oil, rising import costs are dampening demand in the first quarter, traders said.

One deterrent is that VLCCs, which can carry up to 2 million barrels, are too big to dock at Russia's Novorossiysk port where CPC Blend is exported, which means cargoes must be transferred from smaller tankers to VLCCs, incurring additional costs.

"I can see the market creating a clear east/west split. Basrah stays east, CPC stays west," a person involved in CPC oil trading said.

RIPPLE EFFECTS

Meanwhile, TotalEnergies TTEF.PA has provisionally chartered VLCC Amphion to load crude from Fujairah to the United Kingdom on Feb. 6-7, a shipping source said. The charter comes with the option of going via the Cape of Good Hope at about $6.4 million or via Suez at about $3.7 million.

TotalEnergies declined to comment.

Tight ship supply is now hitting the Asian market. Last week, freight rates for a long-range (LR) tanker capable of carrying 670,000 barrels of diesel from South Korea to the UK jumped at least 30% to more than $6 million, data from SSY Tankers showed.

That in turn has pushed up rates for smaller medium-range tankers by 20% for intra-Asia routes.

Rising freight and insurance costs, meanwhile, are constraining diesel and jet fuel shipments from Asia and the Middle East to Europe, traders said. Diesel shipments from India to Europe slumped roughly 80% in January, Kpler data showed.

A 50% jump in freight costs has likely shut opportunities for European refiners to export naphtha to Asia, traders said.

Adding to disruptions in global trade are recent attacks by Ukraine on refineries and a major fuel terminal in Russia, which are set to reduce exports from there, they added.

That has spurred more buyer enquiries for Middle East supplies to Asia, causing a 60% spike in freight rates for LR tankers that can carry 650,000 barrels of naphtha to around $5 million to $6 million, traders said.

Oil tanker diversion https://tmsnrt.rs/3Uj3oZC

Clean tanker freight rates surge https://tmsnrt.rs/47V49ez

(Reporting by Florence Tan, Muyu Xu, Trixie Yap and Jeslyn Lerh in Singapore, Mohi Narayan in New Delhi, Ron Buosso and Ahmad Ghaddar in London and Reuters; Editing by Tony Munroe and Sonali Paul)

((Florence.Tan@thomsonreuters.com; Reuters Messaging: florence.tan.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.