【TMGM Financial Recap】Global Crude Shipping Costs Rise Above $20 per Barrel from $3 a Year Ago: Goldman Sachs on a Key Oil Price Component

Average global costs for shipping crude oil by sea have risen above $20 per barrel from $3 a year earlier, according to four figures highlighted in Goldman Sachs’ 20 October report. On Middle Eastern routes, the cost is $35 per barrel. Of that, $15 per barrel comes from three identifiable components: war risk insurance for the Strait of Hormuz at $7, fuel at $4 and ship-to-ship transfers in the Gulf of Oman at $4.

A cargo carried from the US Gulf Coast to China on a very large crude carrier (VLCC) incurred total shipping costs of $76 million in early October, amounting to approximately $38 per barrel. The same voyage had attracted quotes of $7 million to $10 million before the conflict. Separately, a VLCC was priced at $82 million, following a 50% increase over three weeks.

Freight costs could push Brent crude above Goldman Sachs’ baseline year-end forecast of $90 per barrel, the report says. It lists two further upside risks to that forecast: intensified attacks on shipping and damage to oil infrastructure.

Transfer Queues Keep Forty Percent of VLCCs in and Around the Persian Gulf

The Baltic Exchange assessed the VLCC time charter equivalent rate on the Middle East Gulf–China route (TD3C) at $1.4126 million per day on 8 October. Its assessment for the Middle East Gulf–Singapore route (TD2) on that date was $1.4127 million per day. With TD3C having stood at $210,000 per day before the conflict, the increase is approximately 570%.

Oil-producing countries have had to dispatch their own tankers to collect crude, as buyers’ vessels are unwilling to enter the strait. The loaded tankers then pass through the strait and transfer the crude to ships waiting outside it in the Gulf of Oman. Each cargo consequently needs two loading and unloading operations, with two ships occupied at the same time. Compared with a direct voyage, the journey takes more than two weeks longer. These operations involve nearly one-sixth of the tankers in the Persian Gulf and Gulf of Oman on any given day. Waiting at anchor does not stop charter charges accruing; cargo owners ultimately bear those waiting costs through a charge per barrel.

The Persian Gulf and nearby waters now hold 40% of the world’s roughly 850 VLCCs. Elsewhere, shipping capacity has tightened as higher freight rates draw vessels away from other regions. Middle Eastern crude exports were back at pre-war levels by late September, yet that recovery had not brought a corresponding fall in freight rates.

The pressure on daily vessel rates is spreading beyond these routes. Cargo owners unable to secure VLCCs tied up in the Persian Gulf are using Suezmax and Aframax tankers instead, driving up daily rates for both classes. Fearnleys, the shipbroker, reported in its weekly review that neither class showed signs of a slowdown in rates. This has lifted the global average freight cost from $3 to $20 per barrel. Although routes outside the Middle East remain cheaper than the region’s $35 rate, they too have become more costly as ships are diverted elsewhere. Goldman Sachs judges that the support for freight rates will endure while the Middle East conflict continues in its present state.

Beyond the increase in war risk insurance costs, shipowners face the greater difficulty of negotiating rates afresh each day. Premiums of approximately 0.25% of vessel value before the war briefly rose to 10% after the conflict began. Insurance brokers are currently quoting 3% to 10%, with a midpoint of around 5%. Insuring a single passage through the strait for a ship worth $100 million therefore now costs several million dollars rather than $250,000. With some underwriters unwilling to finalise the rate until six hours before entry into the strait, policies offer only three to seven days of cover.

Higher Freight Costs Lift Landed Prices and Squeeze Refining Margins First

A closing Brent crude price of $108.82 per barrel on 21 October translates into a landed cost of nearly $144 once the $35 freight charge for Middle Eastern routes is included. It is this total that refiners pay.

Higher effective landed prices would weaken overall crude demand from refiners, according to Goldman Sachs’ report. Existing trade flows could also change if refiners opt for suppliers nearer to home. Whereas the gap was less than 5% a year earlier, landed costs now exceed the benchmark market price by 32%. A hedge against that benchmark cannot secure the additional $35 for refiners. As freight becomes more expensive, crude purchases by refiners shrink and crude prices fall faster. Repsol, the Spanish company, reported a $36-per-barrel refining margin in the third quarter, although market estimates indicate a decline to around $15 in October.

Diesel Crack Spread Reaches $100, Adding to Refined Product Prices

Against a usual range of $15 to $30, October’s diesel crack spread was approximately $100 per barrel. Adding the crack spread to the cost of crude gives the price of refined products; that underlying crude cost already incorporates freight.

By 9 October, retail diesel in the US cost $6.2785 per gallon, an increase of more than 70% from a year earlier. Diesel stocks in the US are at their seasonal low since 1982, and those in Europe are below the five-year average. Next month brings the Northern Hemisphere heating season, with the same refining units producing both heating oil and diesel. There is relatively little flexibility in demand, as the US transportation sector by itself uses approximately 2.94 million barrels of diesel per day.

The White House relaxed restrictions on imports of Russian diesel on 9 October under an authorisation extending through 7 April 2027. It followed this on 21 October with a loan of 315,000 barrels, or one-third of the Northeast Home Heating Oil Reserve, to be delivered by 13 November. That reserve was intended to meet only ten days of heating oil consumption in the Northeast. Scope for raising domestic production is very limited, with refinery utilisation at 95% to 100%, according to the American Petroleum Institute.

War Risk Premiums Provide the First Signal of Lower Freight Rates

Hull war risk insurance premiums have moved from 0.25% of vessel value before the war to around 5% today. The insurance cost of $7 per barrel reflects that current premium. Nearly one-sixth of tankers in the Persian Gulf and Gulf of Oman take part in ship-to-ship operations on any given day; the capacity they occupy will not become available to the market until that proportion reaches zero. Alongside that change, VLCC daily charter rates would fall back from $1.41 million to $210,000.

Orders for new crude tankers set a record in this year’s first seven months: 234 vessels with a combined 60 million deadweight tonnes. These ships are due to start entering service in 2027.

Risk premiums could unwind swiftly if geopolitical tensions subside, BOC International (China) Securities cautions. In Caitong Securities’ view, the key issue is no longer “how many ships are available” but instead “how many voyages each ship can complete in a year.” Weekly updates cover freight rates on Middle Eastern routes, the share of tankers involved in ship-to-ship operations and VLCC daily charter rates. War risk insurance rates, by contrast, are refreshed daily. Traders should follow these indicators closely.