Middle East Crude Discounts Deepen as Freight Costs Surge Fivefold

Crude oil transportation costs from the Arabian Gulf to China have skyrocketed over fivefold since the start of the US-Iran conflict, significantly impacting the competitiveness of Gulf crude in Asian markets. Data from the Baltic Exchange shows that freight rates for very large crude carriers (VLCCs) on the TD3C route surged from $45.42 per metric ton on February 27 to $229.76 by the end of September, marking a 406% increase. This surge has eroded the traditional freight advantage of Gulf crude, forcing producers to offer deeper discounts to maintain market share.

The disruptions in the Strait of Hormuz have not only increased costs on the TD3C route but also spilled over to alternative routes like the TD34 route from the Gulf of Oman to China. Freight rates on this route rose from $36.78 per ton in late March to $140.02 by the end of September, nearly quadrupling. By September, the TD3C route was 64% more expensive than the TD34, highlighting the additional costs imposed by geopolitical risks.

The impact of these record-high freight costs has extended to the pricing of Saudi crude in Asia. Saudi Arabia cut its official selling prices for November, reducing the price of Arab Light crude by $3 per barrel and offering discounts of up to $9 on some cargoes loaded offshore Oman. These moves underscore the efforts of producers to offset the competitive disadvantage created by higher shipping costs and preserve their market position in Asia.

Analysts suggest that persistently high freight costs could influence crude benchmarks and encourage Asian buyers to turn to alternative crude grades from the Atlantic Basin. Osama Rizvi of the Primary Vision Network noted that geopolitical risks are the main driver of increased freight rates, which could become a long-term factor in determining oil prices. Michael Ryan of Sparta emphasized that current freight levels are affecting the competitiveness of Arabian Gulf crude, potentially pricing some grades out of Asia unless sellers offer steep discounts.