VLCC Freight Rates Hit All-Time High of USD 1.2 Million a Day Amid Iran War

FT: Freight Rates on Middle East-China Route Double Since Late August

As the Iran war drags on and crude oil supply disruptions intensify, freight rates for Very Large Crude Carriers (VLCCs) operating between the Middle East and Asia have soared to record highs.

According to the Financial Times (FT) on September 23, local time, the daily charter rate for VLCCs transporting crude oil from the Middle East to China surpassed USD 1.2 million (KRW 1.62 billion) for the first time, marking an all-time high. A VLCC is a large oil tanker capable of carrying about 2 million barrels of crude oil per voyage.

Ship brokerage Braemar reported that VLCC freight rates on the Middle East-China route have nearly doubled since the end of August, driving this surge. Transport costs for crude oil shipments from Brazil to China have also jumped by 30% in the last week, indicating that the rapid rise in freight rates is spreading to other routes as well. Throughout most of last year, the daily VLCC charter rate remained between USD 20,000 and USD 50,000. Even in February, before the outbreak of the Iran war, rates hit USD 120,000 per day due to a shortage of vessels, which is still low compared to the current levels.

An oil tanker sailing off the coast of Oman. Photo by Reuters.

The main reason for soaring rates is that established crude oil shipping routes have changed due to the war. The number of available VLCCs is limited, and with the Iran war dragging on, the duration of crude oil transportation has increased as oil is now being shipped from alternative regions such as South America, West Africa, and the North Sea instead of the Middle East. Martin Ratts, an analyst at Morgan Stanley, explained, "Asian refiners are sourcing crude oil from Brazil, Guyana, West Africa, and the North Sea," adding, "This means oil transport alone takes 30 to 40 days."

Waiting times have also gotten longer. Ship brokerage Clarksons estimates that 15% of the global oil tanker fleet is currently waiting near the coast of Oman. As transportation costs have risen, refiners have begun to reduce the production of refined petroleum products such as gasoline and diesel to buffer declining profitability, pushing refined product prices to record highs. In contrast, crude oil prices have been slipping slightly as demand has softened.

On top of this, insurance premiums related to war risks have become an added burden. According to the FT, war risk premiums for some tankers operating in the Middle East amount to about 10% of the vessel’s hull value. This is significantly higher compared to relatively less risky conflict zones, where premiums are typically below 3%.

This surge in shipping costs is placing a direct burden on the refining industry, according to the FT. The FT analyzed, "As Asian refiners cut back on crude oil purchases and reduce operating rates, crude oil demand has declined while prices for refined products such as gasoline and diesel remain elevated." In fact, Hengli Petrochemical, one of China’s largest refiners, lowered the operating rate of its Dalian refinery, which has a processing capacity of 400,000 barrels per day, to 80% as refining margins deteriorated.

Amrita Sen, founder of energy consultancy Aspects, described the current situation by saying, "Everyone wants crude, but no one is willing to buy."

This content was produced with the assistance of AI translation services.