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Mon 14 Oct 2019 08:18 PM

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Oil refineries feel pain as tanker costs spiral out of control

Surge in costs follow an attack on an Iranian oil tanker in the Red Sea on Friday, adding tension in a market that was already soaring

Oil refineries feel pain as tanker costs spiral out of control
Tanker owners were earning in excess of $300,000 a day on the industry’s benchmark route as of Friday, an unprecedented amount, according to data from the Baltic Exchange.

The cost of hiring oil tankers is running out of control and the world’s refineries are feeling the pain.

It cost a record $8 a barrel to ship West African crude to Asia on Friday, according to data compiled by Bloomberg. That’s roughly four times the average for January through August, the month before rates began to rally. Ship brokers were reporting additional bullish charters on Monday.

The surge followed an attack on an Iranian oil tanker in the Red Sea on Friday, adding tension in a market that was already soaring because of US sanctions on units of a giant Chinese shipping company.

“I have never seen freight at these levels,” said Jan-Jaap Verschoor, a director at Oil Analytics, which tracks hundreds of refining margins around the world.

Oil tanker earnings top $100,000-a-day mark

The rates for ships hauling 2-million-barrel cargoes of Middle East oil to China climbed more than 15%, according to data from the Baltic Exchange in London

A $2-a-barrel slump in Singapore margins on Friday was predominantly caused by the surge in freight and similar trends were seen in import-reliant refining locations, he said. The biggest losers from a prolonged surge in freight would be refineries that lack the ability to source crudes locally, making them dependent on long-distance supplies by sea, Verschoor said.

Tanker owners were earning in excess of $300,000 a day on the industry’s benchmark route as of Friday, an unprecedented amount, according to data from the Baltic Exchange. Those same vessels, which can carry 2 million barrels of crude, were earning $25,000 a day about a month ago.

The impact of the freight surge on refining will hinge on how long it lasts. Friday’s incident in the Red Sea followed a series of attacks that hurt Saudi Arabia’s oil production and exports, and made traders eager to source crude from other regions.

The tanker market has been strengthened by US sanctions on units of China COSCO Shipping Corp that made traders wary of booking the company’s vessels. In addition, some ships have been removed from the market while they get fitted with equipment to eliminate sulfur to comply with environmental regulations that start next year.

The attack on Friday added to risk premiums for shipping oil from the Gulf, according to Burak Cetinok, head of research at Arrow Shipping.

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