Tanker freight tests charterers’ limits as transport costs approach 40% of crude value

Exceptionally high tanker freight rates are approaching the limits charterers are willing to absorb, with transportation costs equivalent to nearly 40% of the FOB value of some Middle Eastern crude grades, shipping executives said Sept. 23.

“When you see that 40% of the cost of the cargo is taken up by transportation, there's a point where I think also charterers might want to put an end to it,” Andreas Michalopoulos, CEO of Performance Shipping, said during Marine Money Week Asia in Singapore.

“I think you arrive at some kind of completely irrational, inelastic, call it what you want, type of figures, and that's where we are today,” he said. “We're certainly close to the highest point, or closer to the highest point than we are at the lowest.”

Platts, part of S&P Global Energy, assessed the benchmark Arab Gulf-China 270,000-mt VLCC route at $235.97/mt Sept. 23. This freight cost was equivalent to about 40% of the FOB values of Arab Heavy crude, Kuwait Export crude, and Arab Medium crude, based on the latest Platts assessments. On a delivered-cost basis, the freight accounted for roughly 22%-29% of the combined crude-and-freight value across the assessed grades.

Despite expectations that freight would eventually retreat from current extremes, both executives said underlying tanker fundamentals remained supportive.

“Even if there is a deal tomorrow, things are going to probably normalize but remain healthy for the next year or so,” Michalopoulos said. “Although there is a big orderbook coming on board, all those new ships will start kicking in massively around 2028-2029.”

As of June, the global tanker orderbook stood at 1,491 vessels totaling about 183.3 million deadweight tons, equivalent to roughly 25.3% of the in-service fleet, based on S&P Global Energy CERA data. “The orderbook is so large that the market will likely need both higher recycling and a recovery in cargo demand to avoid sustained oversupply pressure," CERA said.

Higher freight could ultimately affect oil demand through rising delivered crude and fuel costs. Michalopoulos warned that there was “a big risk” of demand weakening because consumption, particularly in Europe, remained closely linked to pump prices.