Unprecedented tanker rates in the global oil market due to political and military crises in Europe and the Middle East have profoundly impacted refiners' oil purchase decisions. These rates have reached new highs and have severely affected market conditions.
Reasons for the Increase in Tanker Rates
The increase in tanker rates is related to several factors. First, military crises in Europe and the Middle East have led to significant inefficiencies in the market. On the other hand, the threat of attacks in areas such as the Strait of Hormuz and the Black Sea has resulted in increased insurance rates and risk premiums. Additionally, widespread sanctions have limited access to conventional and flexible vessels for global trade. Furthermore, the ownership of large tanker fleets, especially VLCCs, has become more concentrated than in the past, transferring negotiating power from charterers to owners.
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Impact on Oil Demand
In the oil market, when prices rise, analysts discuss the price level that leads to a decrease in demand. Currently, Brent crude has reached about $120 per barrel, while VLCC rates have exceeded $1.3 million per day. This amount accounts for 27 percent of the cost of oil delivery. This increase in rates causes refiners to seek oil that provides them with the best refining margin.
If the margin for the ideal type of oil becomes very low or disappears due to high transportation costs, refiners may turn to other oils from closer sources. This allows them to offset quality loss by saving on transportation costs. Otherwise, refiners may be forced to reduce their production capacity.
Despite these challenges, the oil market remains very tight in terms of supply, and refiners have limited options. Most charterers have to pay more to access the oil they need. In this challenging market, tanker owners are also making rational decisions. For example, the owner of a VLCC that has discharged in Asia faces various choices: transferring to the U.S. Gulf to load a long-term cargo to Asia or opting for a shorter trip to West Africa to load a cargo for Asia.
It is expected that as long as oil demand exceeds supply, tanker rates will remain strong. However, once the oil market opens up, rates will quickly decline.
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