Shipowners raise rates for key Middle East route after Iran strikes

A file photo taken on Dec 21, 2018, of oil tankers passing through the Strait of Hormuz. The spike in charter rates shows how the escalating conflict between the US and Iran is spilling over into global oil supply chains.
A file photo taken on Dec 21, 2018, of oil tankers passing through the Strait of Hormuz. The spike in charter rates shows how the escalating conflict between the US and Iran is spilling over into global oil supply chains.PHOTO: REUTERS

SINGAPORE (BLOOMBERG) - Owners of oil tankers are boosting their rates to haul crude on a key route from the Middle East as risks in the Gulf escalate after Iran retaliated against the US killing of a top general.

Shipowners are offering rates for supertankers carrying crude from the Persian Gulf to China at increasingly higher levels, in some cases at least 14 per cent above previous bookings, according to brokers and oil traders in Asia. While there have been no fixtures reported at that level, owners are seeking a premium to enter and load from the region, they said.

The spike in costs for the key shipping route shows how the escalating conflict between the US and Iran is spilling over into global oil supply chains.

It's the latest shock to hit the freight market, which has been shaken over the past year by sanctions on a top Chinese shipowner for transporting Iranian oil and the sabotage of tankers near the Strait of Hormuz - an act blamed on Iran. More recently, freight rates climbed due to new maritime rules that mandated the use of cleaner-burning ship fuels.

"In a situation like this, it's not surprising that shipowners are charging higher freight rates, because they have to protect their balance sheets in anticipation of insurance premiums rising," said Mr Tilak Doshi, a visiting fellow at the National University of Singapore Middle East Institute who previously worked at Saudi Aramco and Louis Dreyfus Energy.

Shipping costs are typically negotiated in terms of Worldscale, an industry standard that reflects a percentage of an underlying flat rate that's fixed for the year. Most costs are currently being negotiated against the underlying 2019 rate.

 Shipowners have offered rates for the Middle East to China route of between 165 and 180 Worldscale points, according to the brokers and oil traders in Asia, who asked not to be identified because they are not authorised to speak to the media.

Earlier this week, ships for the same route were provisionally chartered at between 140 and 150 Worldscale points, up from about 122 before the US air strikes on Friday (Jan 3).

The more bullish sentiment may trickle into other key routes such as Middle East to India, the US and Europe.

Asia, the world's biggest oil importing region, is still heavily reliant on the Middle East for its crude supplies, even as refiners across South Korea, Japan and India seek to diversify.

Opec's top three producers Saudi Arabia, Iraq and the United Arab Emirates pumped more than 17 million barrels per day of oil last month, supplying oil to local refineries and processors across the globe.