Middle East oil exports push tanker costs to 6-year-high amid threat of US-Iran war

By Jonathan Saul and Florence Tan

LONDON/SINGAPORE, Feb 24 (Reuters) - The cost of shipping oil has surged to the highest in six years, fuelled by a wave of crude exports from the Middle East as traders accelerate charters ahead of possible military conflict between the U.S. and Iran, industry sources said.

The cost of hiring a very large crude carrier (VLCC) to carry up to 2 million barrels from the Middle East to China has more than tripled from the start of the year to over $170,000 a day on Tuesday, the highest since April 2020, LSEG data showed. DFRT-ME-CN

Middle East crude exports in February exceeded 19 million barrels per day, the highest since April 2020, data from shipping analytics firm Kpler showed, led by Saudi Arabia, the United Arab Emirates and Iran and as India's demand rose after it cut Russian imports.

"VLCC freight rates have seen many positive fundamental drivers, starting with Venezuela barrels moving on legitimate freight vs a dark fleet before, increased OPEC+ production and healthy crude demand from refineries, particularly from India, which has moved from Russian to Middle Eastern barrels," said June Goh, a senior analyst at Sparta Commodities.

"Suezmax and Aframax markets will soon receive the spillover effects in the dirty freight market," she said, referring to crude and fuel oil transported in smaller tankers than VLCCs.

WAR-RISK INSURANCE PREMIUMS IN FOCUS

War-risk insurance premiums could move higher if Washington moves to strike Iran, and Tehran retaliates by potentially disrupting activity through the critical Strait of Hormuz, a major chokepoint for Gulf oil exports, adding to shipping costs.

"For crude tankers, the key point is that VLCC spot ... (rates do) not need barrels to disappear to move," broker Clarksons said in a note.

"It can reprice quickly on perceived risk through higher war-risk premiums, owners demanding compensation to call the region, and charterers accelerating bookings further out in time to reduce schedule uncertainty."

Commercial maritime traffic in the Gulf of Oman and Strait of Hormuz is seeing an elevated risk of GPS jamming and spoofing of AIS ship tracking, directly linked to ongoing Iranian military exercises, maritime security risk management group Dryad Global said on Monday.

The global tanker fleet has also been reduced due to hundreds of older vessels being sold into the so-called shadow fleet, with unknown insurance cover, that is involved in the transport of sanctioned oil from Iran and Russia.

Oil majors will not use such vessels, tightening vessel availability until new ships join the fleet over the next three years, market sources said.

SOUTH KOREA'S SINOKOR WORLD'S TOP VLCC OPERATOR

Meanwhile, South Korean shipping group Sinokor has recently emerged as a major buyer of VLCCs, reducing the overall supply of such ships in the open market and enabling owners to raise rates for typical 30-day charters, the sources said.

Sinokor did not immediately respond to a request for comment.

The company currently controls about 78 VLCCs in the active daily spot market, estimates from three brokers and shipping officials showed.

This is expected to rise to at least 88 vessels within the current quarter, they said, suggesting the fleet could ultimately exceed 100 ships, potentially reaching 120–130 vessels. The sources declined to comment due to the sensitivity of the issue.

"At the 88-vessel threshold, Sinokor becomes the largest commercial operator in the VLCC segment, accounting for roughly 24% of the spot-trading fleet and approximately 12% of the total global VLCC fleet - an unprecedented level of concentration for a single commercial entity in this market," shipping analytics firm Signal Group said in a note last week.

The overall VLCC market is expected to remain strong, enabling operators to command higher rates, market sources said.

However, Sparta's Goh said: "At some point, expensive freight will hit refining profitability and could be the trigger to reduce demand for the fleet."