Cheap heavy crude oil is piling up in North and South America as refiners in Asia and Europe struggle to secure supplies, Reuters reported. Soaring tanker costs are making it harder to ship the oil to buyers, wiping out much of the benefit of buying it at a discount.
While oil buyers in Asia and Europe are struggling to secure supplies and benchmark prices remain above $100 a barrel, crude oil is becoming cheaper in parts of the Americas.
India could benefit from this shift as refiners look for cheaper alternatives to their usual supplies. However, high shipping costs, limits on how much heavy crude Indian refineries can process and uncertainty over Russian oil supplies could restrict the gains.
Why cheap heavy crude is getting stuck
Heavy crude is denser than light crude and usually sells at a lower price. Many refineries in Asia, the US and parts of Europe are designed to process it. When shipping costs are low, buying heavy crude at a discount can help refiners improve their margins.
But the cost of transporting this oil has risen sharply, making some shipments too expensive to justify.
The cost of hiring a supertanker to carry oil from the US Gulf Coast to Asia has increased more than fivefold since February. The surge has been driven partly by ship-to-ship oil transfers in the Gulf of Oman, which have tied up vessels and reduced the number of tankers available for other routes.
According to Reuters, hiring a supertanker to carry oil from the Americas to Asia cost more than $80 million last week, working out to around $40 a barrel. At the start of the year, the cost was roughly $10 million to $15 million.
Shipping oil from the US Gulf Coast to Europe has also become much more expensive. Speaking to Reuters, Georgios Sakellariou, an analyst at Signal Maritime, estimated the cost at about $46 million, or $24.50 a barrel, including ship-to-ship transfers and other expenses. Before the war with Iran began in late February, the same journey cost around $6.5 million, or about $4 a barrel.
At the same time, supplies from the Americas have increased.
Venezuelan oil exports have risen since the US captured former Venezuelan President Nicolas Maduro in January and began efforts to revive the country’s oil industry. Canadian oil production is also at a record high, while Washington has released more than 130 million barrels from its emergency oil reserves.
The combination of higher supply and rising shipping costs has left more heavy crude available in the Americas, even as buyers elsewhere face tighter supplies.
Heavy crude prices fall, but US refiners cannot buy much more
The growing supply has pushed prices of several heavy crude grades lower.
According to Argus Media, the prices of major Canadian, Colombian and Ecuadorian heavy crude grades have each fallen by more than $10 a barrel to their lowest levels in six weeks.
Western Canada Select was trading at around $74 a barrel on Thursday, while Colombia’s Vasconia was priced at about $84 and Ecuador’s Oriente at roughly $76. These prices exclude shipping and insurance costs.
The discounts could attract refiners because diesel prices are high and heavy crude generally produces more diesel than lighter grades. However, US refiners are already running close to their limits and cannot take in much more oil, analysts and traders told Reuters.
According to the US Energy Information Administration, American refineries have operated at an average of about 93.5% of their capacity on a weekly basis so far this year. This is the highest level in 28 years.
Refineries also cannot replace all their existing supplies with heavy crude. Each plant can process only a certain share of heavier oil, depending on its equipment and design.
Many refineries along the US Gulf Coast are configured to process offshore oil from the Gulf of Mexico, including grades such as Mars Sour. They are not necessarily suited to handling large volumes of Canadian or Venezuelan crude without mixing it with lighter oil.
This limits the ability of US refiners to take advantage of the growing discounts, leaving more barrels available for other markets if shipping costs become manageable.
Asian refiners turn to Gulf oil as shipping costs rise
The freight crisis is also changing the way Asian refiners buy crude.
A Reuters report said refiners in Asia were considering switching to Murban crude from the United Arab Emirates as shipping costs for American oil rose. The stronger demand pushed Murban’s premium back above $11 a barrel over Dubai benchmark prices.
June Goh, an analyst at Sparta Commodities, said supertanker rates on routes from the US Gulf Coast to Asia and from Fujairah towards East Asia had risen by more than 300% since mid-August.
An analyst at a trading firm estimated that Murban was about $2 a barrel cheaper than US West Texas Intermediate crude when delivered to Asia.
A shipbroker attributed the rise in freight costs to two factors. Ship-to-ship transfers are being used as a workaround following the closure of the Strait of Hormuz, making tanker operations less efficient. At the same time, more crude from the Atlantic Basin is moving towards Asia, leaving fewer vessels available for other shipments.
The high costs are already affecting individual deals.
India increases Venezuelan oil imports as Russian crude gets costlier
India’s refiners are also changing their buying patterns as the cost of Russian oil rises and shipping routes become more expensive.
Venezuelan crude deliveries to India are expected to reach around 465,000 barrels per day this month, up from 196,000 bpd in September, according to estimates from energy analytics firm Kpler.
If the shipments arrive on time, October’s deliveries would be the highest since December 2019.
However, Sumit Ritolia of Kpler expects the actual average to be closer to 350,000 bpd because some tankers may not unload their cargoes before the end of the month.
All Venezuelan oil cargoes currently headed to India list Sikka port as their destination. The port serves Reliance Industries’ Jamnagar refining complex, which can process difficult heavy crude grades with high sulphur content, including Venezuela’s Merey.
But the scope for a wider shift towards heavy crude remains limited. Ritolia has warned that higher tanker rates and the limited ability of many Indian refineries to process large volumes of heavy oil could restrict the increase in Venezuelan imports.
Jamnagar’s ability to handle such crude makes it an exception rather than the norm among Indian refineries.
Russian crude is also becoming less attractive to Indian buyers as prices rise and the risk of US tariffs increases. Russia accounted for around 35% of India’s oil imports in September, down from as much as 56% in July, according to Kpler. The price of Urals crude loaded from Russia’s Baltic ports has also risen to its highest level since the start of the Ukraine war.
Bloomberg’s tanker-tracking data showed that Russian oil flows to India averaged 310,000 bpd in the four weeks to October 4. This was the lowest level since March 2022.
Indian refiners have also become more cautious after Trump signed a law allowing Washington to impose tariffs of up to 100% on major buyers of Russian oil.
Indian refiners return to the Strait of Hormuz
Indian refiners are also changing how they source oil from the Persian Gulf.
They are now hiring their own tankers to collect crude from the region through the Strait of Hormuz. Earlier in the US-Iran war, refiners had avoided the route and paid premiums for cargoes sold on a cost-and-freight basis.
The change comes as some Gulf producers offer steep discounts to attract buyers.
Iraq’s State Oil Marketing Organisation, or SOMO, has offered discounts of up to $37 a barrel below regional benchmark prices for October supplies.
Kpler data show that oil flows through the Strait of Hormuz to India averaged around 1.3 million bpd in September. This was the highest level since before the war.
India imported around 5 million barrels of crude oil per day, with nearly 52% passing through the Strait of Hormuz, according to S&P Global’s March estimate. As shipping costs on longer routes from the Americas soar, Gulf supplies could become more attractive because they are closer to India. Cheaper crude from suppliers such as Venezuela, Iraq and the UAE offers Indian refiners an opportunity, but high freight costs, limited capacity to process heavy oil and risks around Hormuz and Russian supplies could limit the benefits.
