By Joe Wallace 

The cost to ship gasoline, diesel and jet fuel around the world has soared to record highs, as traders look to dodge the commodity price crash by stashing refined oil at sea.

Charter prices for vessels that transport refined oil products have tripled since the start of March, according to the Baltic Clean Tanker Index, a gauge of freight rates along 11 shipping routes. The index, calculated daily from estimates submitted by shipbrokers, hit its highest level on record early last week before slipping in recent days.

The coronavirus lockdowns deterred activities like driving and flying that involve burning fuel. The resultant glut of oil sent prices into a tailspin. But with so much extra supply, the price to store or move oil products has moved in the opposite direction.

"The lack of on-land storage, surplus of supply and collapse of demand globally means the oil is on the water, and it's moving long haul," said Claire Grierson, head of tanker research at shipbroker Simpson Spence Young. "We're seeing record levels on some of the routes," she said of freight rates.

Last week, it cost just under $170,000 a day to charter a vessel from the Persian Gulf to Japan, a busy route, according to Ms. Grierson. That is a high for Simpson Spence Young's records and 10 times the rate in early March of $17,000.

Freight and commodity markets have a way of feeding on each other. Because the prices for oil and oil products in contracts for delivery down the road are higher than they are today, traders can make money storing cheap oil today and cashing in on it later.

That creates more demand for tankers as traders are motivated to keep oil at sea, especially with almost nowhere to store it on land. Some vessels moving oil from Asia to Europe are skipping the Suez Canal and taking the long route around Africa for this reason, according to Erik Broekhuizen, head of tanker research at Poten & Partners Inc.

At the same time, high tanker and storage costs put pressure on spot or near-term futures contracts, since owning oil today is more expensive. That dynamic played out in dramatic fashion in late April when the price of near-term oil futures contracts went negative for the first time in history as the cost to store oil shot up.

Refiners, which distill thick crude oil into usable fuels, haven't cut output fast enough to stop a surge in supply. Global stockpiles of petroleum products will grow by around 550 million barrels in the second quarter, according to the International Energy Agency.

A race is under way to store the surplus gasoline, diesel and jet fuel at sea. The number of available "clean tankers," smaller ships that move refined petroleum products, has plummeted. "Dirty tankers" transport unrefined crude.

London-based Signal Ocean Ltd. tracks the location of tankers and where they could travel to if needed. As of Thursday, no Long Range 2 vessels, the largest kind of clean tanker, were in a 15-day range of Jubail, a port city on Saudi Arabia's east coast that is home to a major refinery run by Saudi Aramco and Total SA. At the start of March, 21 of the tankers were available.

"There are very few vessels left," said Semiramis Assimakopoulou, vice president for sales at Signal.

Clean-tanker rates are expected to remain high. As refiners cut production, unusual gaps will emerge in the price of oil products in different regions, according to Lars Barstad, commercial director of shipowner Frontline Ltd. in Norway. That will encourage traders to buy oil where it is cheap, charter vessels, and move the oil to places where they can sell it at a profit.

Logistical difficulties at ports pose further constraints. Tankers are taking longer to unload because there is so little free storage space on land. Coronavirus quarantine measures have added to delays.

"There are bottlenecks everywhere," Mr. Broekhuizen said.

Write to Joe Wallace at Joe.Wallace@wsj.com

 

(END) Dow Jones Newswires

May 03, 2020 09:14 ET (13:14 GMT)

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