Surging freight costs force oil exporters to cut prices

Escalating shipping costs are compelling crude oil producers to reduce prices in order to secure buyers, as delivered costs exceed the thresholds acceptable to Asian refiners. The surge in freight rates, driven by geopolitical instability, is disrupting traditional trade flows and forcing sellers to adjust differentials or source cargoes from nearer locations. Producers are increasingly committing barrels for future loading at prices that offer minimal margin for current shipping expenses, leaving their returns dependent on a reduction in transport costs before the vessels sail.

The impact is most severe in the Middle East, where crude freight rates have risen sharply in two distinct phases since the conflict began in March. Rates for Very Large Crude Carriers (VLCCs) from the Gulf to China initially spiked from approximately four dollars per barrel to seventeen dollars per barrel, before moderating to between eleven and twelve dollars per barrel during the spring and early summer. A subsequent rise, triggered by the end of the US-Iran ceasefire in August, pushed rates to thirty-three dollars per barrel by late September. This increase has driven current landed costs from the Middle East to around one hundred and forty dollars per barrel in China, with rates to Japan and South Korea reaching approximately one hundred and forty-five dollars per barrel.

Alternative loading points have provided inconsistent relief. Freight from Saudi Arabia’s Yanbu terminal to China remained between six and seven dollars per barrel after the initial spike, but restrictions on Saudi cargoes through the Bab el-Mandeb strait drove costs to twenty-eight dollars per barrel by mid-October. Consequently, Saudi loadings at Yanbu have slowed to between 1.6 and 1.8 million barrels per day, roughly half the average for March to July, following intensified attacks on energy infrastructure along the Red Sea coast. This shift has placed significant pressure on Saudi Aramco to absorb part of the cost of moving barrels through the Strait of Hormuz.

Aramco has set the November official selling price for its flagship Arab Light grade at a five-dollar-per-barrel discount to the Oman/Dubai benchmark, partially offsetting the ten to fifteen dollar cost of shipping outside the strait. However, few Asian refiners are willing to charter their own vessels to load in the Gulf. Sales from Sohar, where most spot transactions occur, are reported at Dubai plus five dollars per barrel, yet landed costs in China remain above one hundred and thirty dollars per barrel. To maintain sales, Aramco is fixing price differentials now for loading approximately two months later, securing buyers while leaving the final netback exposed to freight fluctuations. High rates could erode seller margins, potentially resulting in netbacks below the nominal official selling price, though falling shipping costs could later make these deals attractive.

The use of tankers owned by Saudi Arabia’s national shipping company Bahri, in which Aramco holds a twenty percent stake, allows producers to cushion some of this exposure by retaining part of the shipping income within an affiliated business. Although freight is still charged at market rates, shipping earnings can offset some of the pressure on crude sales. By September, the freight surge had extended beyond the Middle East. Brazil-China VLCC freight reached approximately thirty-six dollars per barrel by mid-October, taking landed Tupi prices to around one hundred and forty dollars per barrel. With Chinese buyers seeking delivered prices closer to one hundred and thirty dollars per barrel, Brazilian offers to China have slowed, making India a more attractive destination for Brazilian sellers.

West African producers face similar pressures. The Djeno grade is trading at a ten-dollar-per-barrel discount to ICE Brent, but VLCC freight from West Africa to China costs roughly thirty-four dollars per barrel, which is nine dollars more than shipping to India. This cost advantage is redirecting cargoes historically destined for Chinese buyers towards Indian refiners. India’s imports from Angola are estimated to rise from thirty-five thousand barrels per day in September to three hundred and fifteen thousand barrels per day in October, with additional cargoes from Gabon and Congo also heading to India’s West Coast.

These shifts indicate that deeper crude discounts no longer guarantee competitive delivered prices. Producers pricing against Dated Brent, which reflects the tight physical crude market in the North Sea, are cutting FOB differentials to accommodate higher shipping costs. Russian Urals, generally linked to Dated Brent, was assessed at an eight-dollar-per-barrel premium to Dated a month ago but is now trading flat against the benchmark, with further downside expected. The premium on predictable arrivals is evident in Russia’s ESPO trade, where Chinese state-owned companies bought all November-loading cargoes by early September, much earlier than usual. This trend shows that record-high freight is reconfiguring Asian trade, with refiners prioritising short-haul voyages and spot cargoes from Middle Eastern suppliers, while looking to West Africa and Latin America to optimise their supply slates. The most attractive barrel is increasingly defined by the certainty of its final cost and arrival date.