Oil & Energy
Elevated Tanker Rates Weigh on Gulf Crude Exports Despite Rebound in Hormuz Traffic, Kpler Says
High tanker freight rates in the Middle East Gulf are weighing on crude exports from the region despite a recovery in vessel transits through the Strait of Hormuz following a US-Iran memorandum of understanding, according to Kpler analyst Matt Wright, in a Tuesday note.Wright noted that freight rates on the MEG-Asia route are expected to "remain elevated" due to uncertainty surrounding the US-Iran agreement and disruptions in the Strait of Hormuz.These high rates are in sharp contrast with narrowing crude differentials in the region. As a result, Very Large Crude Carrier freight costs rose to 19% of the value of Abu Dhabi benchmark Murban crude as of last week."That exceeds the previous record of 17% set at the start of the conflict," Wright said.Wright noted bullishness in MEG-China VLCC freight rates over the next two to four weeks. He attributed the outlook to owner caution and limited willing tonnage entering the Gulf, pushing rates higher despite a recovery in Hormuz transits.Additionally, prompt Gulf crude differentials are expected to remain under pressure.With freight rates hitting 19% of Murban value, the highest on record, refiners are unwilling to pay higher free-on-board premiums.FOB essentially entails the delivery of cargo onto the ship at the point of origin, where the buyer pays for freight, insurance, and other transportation costs. An FOB crude price reflects the value of crude at the export terminal, excluding shipping and insurance costs.Kpler pegged Atlantic Basin VLCC freight rates as "constructive." However, unladen ballast vessels continue to remain scarce."Vessel repositioning toward the Gulf and continued owner reluctance to ballast west should tighten Atlantic availability," according to the note.The analyst said owner earnings are expected to remain bullish. "Owners already positioned in the Gulf retain pricing power while uncertainty persists," Wright said.Freight normalization could be achieved through a sustained period of uninterrupted Hormuz transits and clear security guarantees.Uncertainty prevails around the MoU between the US and Iran signed last week, Kpler said."Following the signing of the MoU between the US and Iran last week, under which Iran agreed to allow transits through the Strait of Hormuz to resume unimpeded, the number of tankers entering and exiting the MEG climbed to 17 on 20 June, up from just two a week earlier," according to the note.However, this increase occurred shortly before Iran announced that the strait was closed again. "As expected, outbound vessels account for the majority of transits so far," Wright said.The first four weeks since the MoU are "critical" for rebuilding shipowner confidence, with volatility and uncertainty around the Strait's status delaying the process.Shipowner sentiment remains cautious toward transits through the strait."As a result, transits remain limited, and freight remains elevated, broadly in line with our expectations," according to the note.However, the analyst said that tonnage outside the MEG continues to rise, while the number of vessels willing to enter remains relatively low."Availability outside the Strait is not the constraint; owner willingness to bring vessels into the Gulf remains the bottleneck," according to the note.The rise in transits aligns with Kpler's estimates.Since the MoU was signed on June 18, 12 VLCCs have entered the MEG.Of these, five carried sanctioned-linked cargoes in the previous 12 months, and all seven non-Iranian-linked vessels can be linked to South Korean shipping company Sinokor, which controls nearly 130 VLCCs and therefore retains significant negotiating leverage in the market."Consequently, while more VLCCs are entering the Gulf, the shift has not materially improved charterers' negotiating position," according to the note.The concentration of willing vessels has limited charterers' bargaining power and prevented a significant easing of freight costs despite increased tanker arrivals.Wright said they remain bullish on MEG-China VLCC freight rates through early July, citing constrained vessel availability within the Gulf and a slower-than-expected recovery in owner confidence."The key downside risk is a rapid normalization in owner behaviour that brings a larger share of the waiting fleet back into the Gulf faster than cargo demand expands," the report said.